Is your business as profitable as it should be? If not, then what can you most easily change, tomorrow? If you’re like most entrepreneurs, then you’re probably focused on working hard to increase your sales. After all, if you’re successful at marketing, then won’t the added income make your business more profitable?
Although that’s true, the fact is, cutting costs is often quicker and more permanent and thus essential. However, as a business owner or manager, you probably struggle with this kind of adjustment, even though it is critical to your overall success.
Today we’re going to discuss the importance of reducing your expenses and how to go about it effectively. Even if you’ve been dreading the idea of cutting costs, now is the perfect time to make a change.
The Psychology of Cutting Costs
So why is it that so many businesses loathe this process? Well, it is viewed negatively. Typically, cutting costs will mean that someone is losing money (or a job) which can weigh heavily on the business owner. Essentially, there is a thrill in making a sale, because someone is made HAPPY, whereas in cutting a cost, invariably, someone is made SAD.
This psychological dilemma is further complicated by the fact that smaller business owners are usually more comfortable handling the front end of the business – making sales and speaking with customers – than the unfamiliar territory of cost-cutting, an area of the business which they do not handle daily, and which, therefore, is not a comfort zone.
However, one must note, big corporates frequently go on cost-cutting exercises. Why? Because they know it’s imperative to stay lean and efficient to increase profitability.
For example, if you have to cut hours to reduce labor expenses, you then feel bad that your employees are making less. Similarly, if you have to remove items from your inventory, you may be upsetting some of your most loyal customers as well as the supplier of that product.
As such, it’s imperative that you adjust your thinking to make this process a positive experience. Rather than focusing on the negative aspects, focus on how these changes will improve your business.
Sure, a customer may initially be upset that you’re taking away a product that they sometimes bought, but if they get better service and attention on all the remaining products that they always buy, they become even happier.
Likewise, a supplier may be upset that you’re eliminating their service offerings, however, view it in the context of the bigger picture. Efficiency gains benefit everyone and even the ‘affected’ supplier in the long-term. Imagine if people since the beginning of time had always chosen ‘peoples happiness’ over ‘efficiency gains’. Would we have the luxuries and standards of living that we have today? Generally, in today’s world, improving an efficiency also most often results in a reduced carbon footprint too, as is the scenario when engaging Monit’s OSHA services.
Is cutting an efficient (expensive) service really being unkind? Whenever you deploy your scarce resources to another means of more efficient production or a more efficient solution, you’re not only minimizing your carbon footprint for the good of all mankind, but you’re shifting your expenses to others who may be more deserving because they are more efficient and likewise you’re able to pass on these efficiencies and cost savings to customers. Efficiency requires fewer resources than inefficiency. The beneficiaries of efficiency include everyone. Progress with technology and computers do not take opportunities away from people. Momentarily it might do, but overall the added efficiencies improve standards of living and also mean boring, repetitive and demeaning jobs can be done away with. More hands on more tools used to be the mantra. Now it’s less hands-on, better tools!
In the end, it’s imperative that you get into the right mindset and approach this topic with the care and attention it deserves. Rather than cutting costs based on percentages, reduce your spending in a meaningful and proactive way.
Why is Cost-Cutting Essential?
Let’s first address the elephant in the room; business owners can often be heard saying: We will just write this expense off to taxes (i.e. this expense is a tax write-off). Firstly, if you’re in a partnership, expenses decrease the profit that is shared, so it generally never helps. Using expenses as “tax write-offs” only ever can possibly help if you are a sole proprietor and you have a very stable monthly income (steady and unchanging, as per rental income) where you know, by virtue of good Tax Accounting knowledge, that an expense will help reduce your profit and in so doing land you in a lower tax bracket at Year End. But for the majority of business owners, this luxury is only a pipe-dream and predicting our annual revenue stream or exact Taxable Income for the Tax Year is impossible.
No matter what kind of business you’re in, it is always a good idea to focus on lowering costs of production. You may be operating inefficiently in certain areas of the business without even knowing it. Usually, when the business is making money, cost-cutting is not on anyone’s mind. As you expand and grow the company, you’re spending more to make more, so why would you try and tighten your belt?
It’s not until you realize that your expenses are out of control that you take action. However, this is far too late. Instead, even if things are going well for your business, you should look at ways to streamline your operation.
Cutting costs will benefit you by:
- Increasing your profit margins
- Ensuring that you’re investing your money wisely
- Helping you pay more attention to where your money goes and why
How to Cut Costs Effectively
At first, you may dread the idea of reducing your expenses, but once you realize that it has to be done, your initial reaction will be to lower costs across the board. However, this is a huge mistake. It’s imperative that you analyze your expenses so that you can make cuts that are meaningful.
In short, it’s better to cut 10% that was unnecessary to your operations than cut 20% and lose quality. So, here are some things to keep in mind when cost-cutting.
- Think of your expenses as investments, not money pits. Overall, you want every dollar you spend to be netting you a profit, even if it doesn’t seem like it at the time.
- Eliminate waste, both physical and abstract (i.e., time)
- Reduce redundancies and simplify operations
- Renegotiate with suppliers and change vendors to get a better deal
- Remove anything that isn’t making money; focus on profitable items only
Bottom Line
When it comes to cutting costs, Monit can potentially save you a couple thousand per year, or more. Monit’s average savings to business are $2500 per annum. Firstly then, you need to calculate whether your current OSHA supplier relationship is worth an extra $25,000 over the next 10 years? Always remember however, to cover $25,000 a sale of at least $100,000 must be made and it assumes a clear 25% profit. But not all jobs go smoothly, plus in doing the job one must be aware of future costs in honoring warranties and guarantees. Given all the risks associated with doing more work, it is always easier to rather cut unnecessary costs to increase profitability.
If the relationship is worth doing the extra $100,000 sale, great! If it is not, then an honest cost reduction (Vendor Termination) letter needs to be transcribed asap.
Using a logical and fair system can help you make the changes you need without all the negativity. An honest Termination of Services letter is the best way to conclude matters. Contact us today to find out more.