A useful guide to cutting operating costs
SMALL businesses have been hit with escalating operating costs amid rising municipal charges, fuel price hikes and the recent VAT increase.
Such costs can pose a serious threat to the survival of any small businesses. A recent report by accounting software firm Xero1 showed that increasing operating costs are among the top 10 challenges for small businesses in South Africa.
A constant focus on identifying and cutting unnecessary costs should therefore be part of every entrepreneur’s list of priorities. These will not only boost the bottom lines, but will also improve the business’s ability to raise capital as funders and lenders place a high value on the ability to minimise spending while maximising output.
Businesses need to draw a meticulous and practical plan to reduce spending without impairing the day-to-day functioning of the business.
Examine the list of suppliers to make sure quotes are still competitive and look for bargains wherever possible. Suppliers may offer discounts on bulk orders for goods that are used regularly, so buying wholesale may be the answer. If the quantity is too large, explore opportunities to partner with neighbouring businesses who are willing to buy and split the orders.
Check whether services provided are genuinely still required as there might be some that are no longer necessary or not used regularly enough to justify the ongoing expense. Negotiate equipment leases and ascertain which maintenance and service contracts are still required. It may, under some circumstances, be better to pay for repairs on an ad hoc basis.
Experiment with restructuring employee remuneration (possibly introducing other perks that employees may value more in the place of higher salaries when the business cannot afford it) to reduce costs and provide more incentive for greater output. You can also cut costs by outsourcing some roles to freelance professionals. It is important to conduct research into the ways that other businesses have used to reduce staff costs without negatively affecting employees and efficiency in the business. infrastructure to the cloud, free apps and tools, and green technology can all help to contribute to lower operational costs.
There are costs that businesses spend money on but do not bring much value to operational efficiency or customer service. Common examples include magazine subscriptions, excessive catering for meetings, as well as expensive packaging.
Involve business advisers, existing financiers and the company’s accountant in one’s cost-control programme. The financiers who already have a stake in the business can offer advice, as well as point out possible risks or advantages in a business’ cost reduction strategy. Similarly, accountants and advisers typically deal with many businesses, and are in a strong position to help identify unnecessary costs.
Small businesses are constantly squeezed by increases in expenses, and with economists predicting South Africa may achieve only 2% economic growth over the coming year, it is becoming increasingly important to have an operation that is as cost-efficient as possible. Controlling how money is spent inside the company is a crucial component to increasing profit margins.
Bierman is a managing director at Business Partners Ltd.