Six clever ways to cut costs, not staff, in a small business
When business looks a little shaky and creditors are lining up to get paid, it can be easy to look for ways to cut costs, but that doesn’t mean staff.
This article was first published in February, 2014.
When business looks a little shaky and creditors are lining up to get paid, it can be easy to look for a fast cost-cutting solution.
“Many business owners have their heads on tools, they haven’t had a chance to stick their head above water and see what is going on, and they get to a point where a crisis arises and the bank won’t give them more money,” says Pitcher Partners NSW director David Staples.
In a situation like this, often the simplest answer is to cut staff, with a plan to re-hire when finances improve.
The trouble with this action, aside from disappointing a team member and reducing morale among remaining staff, is that a great deal of knowledge and experience will walk out of the building. When you move to re-hire down the track, you will have to reinvest in training to get new team members up to scratch.
But there are a number of ways to shave costs without turning to head counts.
Here David Staples and The Practice director and small business advisor Jason Cunningham offer six top tips to cut cost, not staff.
1. Provider management
Staples says a full review of services, key overheads, pricing and necessity is the first step.
“Ask, do you need the flowers on the front desk, do you buy too much stationery?” he says. “Then you can look at your phone and internet providers…these days if you threaten to leave they may give you a better deal.”
Staples says to review your insurance costs across all aspects of the business and to shop around for better quotes.
“Inevitably you could get better insurance coverage or cheaper,” he says.
He says to analyse your use of professional services firms and how necessary each service is. For example, he suggests using accounting software for the basics, and paying the professionals for more complex tasks instead.
2. Treasury management
Many people have bank accounts that they have not updated for years, meaning they could be missing out on interest.
“A lot of businesses leave money sitting in cheque accounts, and that is not interest bearing,” Staples says.
Alternatively, a lot of loans are on very high interest rates and there may be a better way to service the loans.
“A lot of banks charge a margin above the interest rate, and that is determined on security and risk in the business,” he says.
“Small business may have borrowings on their residential real estate, and they may not have reviewed these for a while, and the value might have gone up.
“They may get in a position where the bank could reassess their risk and lower their margin and consequently the amount of interest that they pay each month.”
Staples says that as interest rates are historically low, it could be worth fixing the rate on part of a loan. He also advises locking in foreign exchange at a known interest rate ahead of making large purchases.
3. Tighten processes
Cunningham says to avoid cutting staff, it is essential to ensure each member of the team is being used effectively.
“Processes are all about driving efficiencies and making sure people are effective with their time,” Cunningham says.
“In accounting, there is the whole push towards cloud technology to create efficiency for accounting firms.”
The preparation of financial statements and your tax return is now seen as a commodity, and where the accountant adds value is where he or she provides value-add services.
“We spend a lot of time using software like Xero…Then we pass that cost-saving on to the customer or we can provide more value-added services at the same price, so the customer thinks we are the ants pants!” he says.
He advises business owners to look at ways the team can create more in the same amount of time.
“We want to create an infrastructure that enables people to get paid more, where we enable people to have a sense of ownership, and enable them to feel involved, which keeps staff happy.”
Staples says it is also important to find ways for the business owner to work more efficiently too.
He suggests a solution is to hire a one-day-a-week chief executive or chief financial officer. This could be a retired expert who can keep an eye on financials via cloud systems, and offer their advice on processes once a week.
“You may say that increases your costs to pay for a CEO one day a week, but what it should do is enable the owner to be more effective and grow the profitability,” Staples says.
“There is a bottom-line positive impact, as most small business can’t afford someone with CFO skills, but by looking at a model like that where you get some skills one day a week, it can free the owner up much more to do what he or she is best at, and it may increase profitability.”
4. Eye on imports
For companies that import goods, Staples suggests there could be some good savings to be made when it comes to customs compliance.
“You can obtain from customs for a nominal fee all of your import and export transactions, and you can analyse that to see how much duty, GST and freight has been paid,” he says.
He says some businesses have their goods delivered to multiple ports, which means they are paying multiple fees on freight.
“If you can understand all that, you can direct your suppliers in a way that is effective for your freight costs. We’ve found some clients who were having very significant overpayments of GST and therefore significant overpayments of customs duty.”
5. Rationalise products
Some businesses offer too many variations on products and services which prove to be unprofitable, Staples explains. They could benefit from rationalising choice, thus limiting the costs spent creating more colours and styles.
6. Review your customers
Cunningham says it may sound “crazy”, but one way to cut costs could in fact be cutting some customers.
He says some customers can chew up more time than they pay for a service.
“Once you get your business in a position where you don’t need to take every Tom, Dick, Harry or Harriett, the power then becomes in the clients that you turn away,” Cunningham explains.
He advises asking potential clients to fill in a short questionnaire about their business and what service they want, then following up with a meeting to establish if each business is a good fit for the other, before undertaking the work.
