How to reduce business costs
What is cost reduction in business management?
Cost reduction in business management is the review of the company’s operational costs, such as staffing, lease commitments, stock acquisition costs and similar.
The purpose of the cost reduction exercise is to ensure that the company is obtaining best value for many in its expenditure and outlays, and that it is not overpaying for good or services that could be achieved at a lower price elsewhere.
Staffing levels may also need to be reduced if workloads reduce, to ensure that the company does not have more staff than it requires. The company may have a trading premises that is larger than it requires, and by relocating to smaller premises it may save on its rental outlay.
Another consideration may be in outsourcing work currently done in the company, where the costs of engaging a third party are less than those the company itself will incur.
The ultimate purpose of a cost reduction exercise is two-fold – firstly to reduce costs, thereby increasing profitability, and secondly ensuring that all remaining costs cannot be reduced further.
Why is reducing costs good for a business?
Reducing costs increases the funds available within the company. This can translate directly to increased profits and therefore dividends to shareholders, or could free up working capital to fund expansion or growth of the company.
Undertaking regular costs reviews also ensures that the company minimises its absorption of cost creep as suppliers increase their costs.
What are the biggest expenses a business has?
This will depend on the nature of the business, but it is usual for companies to have significant expenditure in respect of employee costs, taxation from HM Revenue & Customs, supplier costs and property rental costs.
What are the cost reduction techniques?
Whilst it varies from business to business, employers will have an expectation as to the level of work their staff would undertake, which would collate with the level of their clients. For example, a PR agency may need three account executives to service three retained clients each, leaving capacity for ad hoc and similar work. Therefore, the PR agency in this example would need at least nine retained clients to provide adequate work for the three account executives. If the company lost clients, and did not immediately replace them, with only six retained clients, this would indicate that the company is operating with an account executive who does not have any work to do.
In terms of supplier costs, the easiest way to review these costs is to seek quotes from competitors to your suppliers. Wholesale prices for materials may be cheaper at another wholesaler than the company’s current supplier, and it therefore may be prudent to open a wholesale account with that supplier and purchase goods there.
With regards to external professional services, the company may wish to time limit the work and invite companies to tender periodically for the work. This would provide a structured approach to reviewing both service levels and costs.
It is also important to have a proactive and engaged accountant who can identify tax efficiencies and tax reclaims that the company may be entitled to, as tax legislation changes from time to time.
What Do Cost Savings Consultants Do?
A cost saving consultant is a third party that will review your company’s expenditure and will work to identify the areas the company can reduce costs and report these saving opportunities to the board for consideration.
Why Hire Cost savings Consultants?
It is likely that company directors will have a number of day-to-day responsibilities and outsourcing cost reviews will ensure the reviews are undertaken, whilst allowing the directors to focus on their day to day work, needing only to review the findings and make decisions on what steps to take.
What are the advantages of cost reduction?
The primary advantages of cost reduction is that it will free up working capital within the business for further investment, or alternatively, where this is not required, lead directly to increased profitability.
How can a small business reduce costs?
Both small and large business will have suppliers that they work with, and many will have trading premises and staff. As a result, the same principles apply in reviewing a company’s costs, no matter the size of the business. It is just likely that in small, and particularly micro business, there will be limited opportunity to make savings.
What is the difference between cost cutting and cost reduction?
Cost cutting and cost reduction are effectively interchangeable expressions.
Cost control is different to cost reduction / cost cutting, as cost controls primary aim is to ensure that the cost to produce a product is the same as the cost that was estimated, and seeks to ensures costs of production do not exceed the estimates.
What can I write off as a business owner?
The write offs available to a company vary from sector to sector and should be discussed directly with your accountant. If you are tendering for a new accountant, this may be a useful topic of discussion to quantify the value of the accountants you are in discussions with.
For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk