A use­ful guide to cut­ting op­er­at­ing costs

BUSI­NESS 101

Sunday Tribune - - BIZ -

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.

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