In this guide, you’ll learn how to cut costs, get more efficient and protect your profits.
What is cost-cutting?
Cost-cutting is a process companies use to reduce expenses and improve profitability. Cost-cutting measures are typically implemented during times of financial distress or economic downturns.
Businesses must approach cost-cutting with a defined strategy rather than arbitrarily making changes. Cutting costs doesn’t mean completely cutting all costs. Instead, it means finding ways to optimise workflows or make operations more efficient. A careful review of your expenses is needed to identify areas where you can make cuts.
Naturally, some costs are fixed, like rent, insurance and business software, while others are variable, like sales commissions. This will impact your budgets and forecasting and needs to be considered when planning where to make cuts.
Why is cutting costs helpful to business?
Cutting costs is helpful to your business because it may balance lagging income and enable you to remain profitable.
Healthy profits earlier in the year can help prop up a business’s bottom line during leaner months. But if this continues for too long, there’ll be pressure to balance it, especially if it starts to impact cash flow and your ability to pay employees and bills. However, you should consider optimising your total spending rather than just looking for areas to cut costs.
Strategies to reduce costs in business
Strategies to reduce costs in business will focus on ways to save money and cut costs while increasing productivity and revenue:
Automate admin tasks with software
Automating admin tasks with software can increase productivity by freeing up team members to work on more valuable tasks.
Review your workforce
Review your workforce to see where you can save. Depending on the industry, staffing costs can account for a large percentage of a business’s expenses.
Before resorting to layoffs though, see if you can improve employee performance and productivity through training and development.
Consider outsourcing admin tasks
Consider outsourcing admin tasks like bookkeeping, HR and other business management tasks. Once overheads and other employee costs are taken into account, outsourcing may cost less than employing specialists in-house.
Consider allowing remote work
Consider allowing remote working to improve employee satisfaction and retention. Additionally, you may be able to downsize the physical area your business requires or sub-let excess space.
Get on top of miscellaneous business spending
Get on top of miscellaneous business spending. Small things add up, so it’s essential to keep track of all of your business expenses. Instead of purchasing stationery ad-hoc, take advantage of discounts on bulk orders and stock up for the year. Reducing phone bills, selling excess computer hardware and peripherals and switching lights off overnight will all help cut costs.
Negotiate with vendors and suppliers
Negotiate lower rates with vendors and suppliers using quotes from other companies. Consolidate your business purchasing to a few preferred suppliers to get better discounts and build stronger relationships. This can help in the future should you need to negotiate longer payment terms.
Risks associated with cost-cutting
While cost-cutting can help your business stay profitable, there’s the risk of too much getting cut, leaving your business with new challenges. Make sure you’re clear on your operating costs before making cuts. Otherwise, your business could face the following:
Inability to complete projects with a reduced workforce
If you have the inability to complete projects with a reduced workforce, it can affect your customer experience. Customers may forgive a delayed project the first time, provided they’re given ample notice. However, if this occurs regularly, they’ll take their business elsewhere.
Removing staff could be more expensive than keeping them
Removing staff could be more expensive than keeping them, so before going through layoffs, consider the costs involved. You also need to make sure you know your obligations as an employer and the entitlements of your workers. Can you re-train or re-deploy your employees elsewhere in your business to generate more value?
Increased staff turnover rates due to a decrease in morale
You may see increased staff turnover rates due to a decrease in morale. When personnel are laid off or leave for better job security, this can significantly impact team morale. Low morale may also decrease productivity and lower profits.
Lowered customer satisfaction
Lower customer satisfaction — and lost business — can come from cost-cutting when a change in suppliers or reduced workforce impacts quality.
Cost-cutting tips
These cost-cutting tips can help you plan and implement your measures effectively:
Plan your cost cuts thoroughly
Plan your cost cuts thoroughly, carrying out a complete analysis of your expenditure. Identify items that can be removed and note any agreements and discounts you may no longer be eligible for if you adjust orders.
Likewise, review insurance policies to check that you’re not over or under-insuring the business. Consider using accounting software to automate workflows, save time and increase efficiency.
With MYOB Business, for example, you can streamline your invoicing and automate payment reminders. Likewise, you can auto-generate your business activity statement with your GST records.
Frequently review and adjust cost cuts
There’ll likely be a “settling in” period as the business adjusts to the changes from cost cuts. Following this period, review the outcomes to ensure that any changes you make positively impact the business. If some changes haven’t had the intended impact, you may need to adjust or revert.
Implement a system to identify and monitor significant cost areas
Implement a system to identify and monitor significant cost areas. While a spreadsheet is one way to keep track of your finances, using software like MYOB removes the guesswork and lets you track your income and expenses.
With MYOB Business, you can track your business performance and get the insights you need into your spending.
With MYOB you can:
Track income, expenses and net profit from your dashboard
Customise financial reports to see the data you want
Have all your financial information in one place
Create easy-to-follow budgets that you can scale
Set spending limits and alerts so you don’t accidentally overspend
Connect bank accounts and set up datalinks to make sure every dollar is accounted for
Cost-cutting FAQs
What are the benefits of cost-cutting in business?
The benefit of cost-cutting is that it’ll improve your business’s profitability by identifying areas of wasted spend. While this always makes good business sense, this is especially important when times are tough and sales are down.
Can cutting costs quickly negatively impact a business’ financial performance?
Cost-cutting without a strategic plan can put your business in even greater financial straits. For example, the fallout could be lost customers or hiring expensive specialists to fix things.
What is the best method to reduce costs in business?
The best method to reduce costs in business is to review profit and loss statements for your major cost centres. Do a deep dive into each of these, looking for areas where you can reduce costs. Track these against your budgets and forecasts throughout the year to keep you on track.
Get clear on your costs to cut straight to profits
While it may be scary to confront your business finances head-on, the longer you put it off, the worse your financial situation may become. By getting a clear idea of your costs and where you can cut them, you may be able to improve your profitability and relieve stress.
Tracking your income, expenses and net profit with MYOB Business improves business efficiency and gives you the financial insights you need to adapt to a changing market. Get started today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.