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How to cut business expenses
How to cut business expenses

How to cut business expenses– A guide for small businesses

It’s no secret that being a business owner can be an incredible opportunity, while also presenting significant challenges on a daily basis. Business owners are battling many different fronts, from keeping employees and customers happy to keeping up with rising demand and the costs associated with doing business. This is especially true when an economic downturn is taking control of your business right before your eyes. The good news is that your business can do more than just survive, but actually thrive through record inflation. While we like to help our clients focus on raising their revenue, at times it can be just as important to cut back on expenses to regain positive cash flow. We’re helping our clients cut expenses strategically, all made possible with complete and up-to-date books.  

Before you start cutting costs…

Although this is a guide to cutting expenses, it’s important to start with a little reflection. Examine your data, plans, and goals to make sure your decisions don’t derail top priorities. Look at these two key parts of your business first:

1. Review your budget 

Any time you feel the need to start cutting expenses, pull up your business budget and compare projected costs with actual expenses. Identify which expenses are tracking below, at, or above the budgeted amount. Keep in mind these numbers are budgeted, and outside factors may have impacted your ability to stay within budget. Review and update your budget on a regular basis—especially during times of growth, inflation, or market changes.

2. Know your customer value proposition

Without your customers, your business would cease to exist. Your customers come to you for your superior product, advanced technology, or exceptional service. Do you know what sets you apart, and what unique value your business provides? If not, it’s important to take a quantitative and qualitative approach to understand your customer value proposition. 

Understanding the value proposition before cutting expenses is important for a few reasons. First, are you under-charging your customers for the value you provide? Maybe your customer is willing to pay more in order to receive the same level of quality and service you provide, which could help with the issues that led you to explore cost cutting. If that’s not the case, make sure you are clear on non-negotiables. If you diminish your value proposition in the name of cutting costs, you’re going to struggle to recover.

Start with the unnecessary and costliest items

This may go without saying, but start identifying cost-cutting opportunities with the highest recurring expenses, or those that may be more of a luxury than a necessity. Below are a few examples of common high-cost expenses and other targets for cost cutting, followed by a more detailed discussion of how to analyze each one:

Payroll

Payroll is an expense that can put small business owners into a stressful bind come payday, especially for those who run a business on a slim profit margin. There are a few options to reduce payroll costs. 

  • Retain your staff, and ensure they are happy. You may be surprised by this option but in many cases, the cost of hiring new staff can be more than 150% of their annual salary. If you have a talented team, ensure they are satisfied where they are, and provide opportunities for growing with your business. Investing in your people offers the best long-term cost savings when it comes to payroll.  
  • If your business needs to cut costs drastically, and immediately, letting team members go might be the best option (permanently or temporarily). However, in many cases, we’ve seen layoffs lead to the business owners trying to wear too many hats at once, ending up stretched too thin with no time to grow the company. This is where enlisting the help of a freelancer or contractor can come in handy. You can hire them on a part-time or project basis, meeting the needs of your business. Working with a freelancer can also help to cut costs on taxes and other employee-related expenses.
  • Automate the payroll process. It may not be the employees themselves who cost your business, but the time it takes you or another employee to manually run payroll and maintain compliance. A cloud-based payroll app can automate the payroll process, ensuring people are paid on time, manage time tracking, and remitting required tax payments.  

Inventory

As a startup, inventory and product expenses can be a major hit to your budget. Inventory and product management can be great areas to explore to identify cost-cutting opportunities. Maybe you keep an unnecessary surplus of inventory on hand, or the cost of your supplier has increased. Both can be expenses worth examining. If you are already using a cloud-based inventory system, such as Dear inventory management, you can view your inventory on hand, costs associated, and narrow down specific products or vendors with the highest costs. From there you can develop a strategy to relieve some inventory on hand and better manage your inventory going forward, or explore lower-cost vendors. 

Taxes

Taxes can also be a big expense, especially for a new business owner. While paying taxes is a necessary part of business, there are ways to reduce your taxable income. Planning and organization are the key components to reducing your business taxes. A comprehensive tax plan that covers multiple years can often offer significant tax savings.

We have developed a free guide to small business tax deductions. You will find tips, the top deductions, and how to track your business expenses. 

Leases and rent payments

Take a minute to examine how your employees work. Are they mostly remote, hybrid, or in-office on a daily basis? Many businesses shifted the way their employees work and found employee satisfaction increased drastically when people had greater flexibility. If your employees work fully remote or even in a hybrid arrangement, there’s a good chance you can reduce your office space. 

You may be locked into a long-term lease. In some cases, there is room for negotiation, or even sub-leasing some of your space. If you’re not locked in, it might be an ideal time to look for more cost-efficient office space, or consider changing your employees’ work style to eliminate a business office altogether. Coworking centers and shared offices offer a great way to maintain the flexibility of having space when you need it with less overhead. This also goes for warehouse space for product-based businesses—improving inventory management could lessen the space needed to store the product.

Get granular

Take the time to review all expenses, no matter how minor they may seem. The best way to do so is by reviewing the expense accounts on your P&L. From there, you can examine each and every expense category, per product/service, by vendor, or separated by specific time periods. When combing through expenses, keep in mind that 1) every little expense adds up, and 2) most expenses are also tax deductions. As you build out your cost-cutting strategy, keep your tax advisor in the loop so you can understand how lower costs will impact your tax bill. We can’t overemphasize the benefits of a comprehensive tax plan that you review and update regularly.

Lower long-term costs with better systems and procedures

One of the most optimal options for cutting business costs is to establish proper systems and procedures that reduce or eliminate manual work. Adopting cloud-based accounting apps can simplify your processes, all while saving you and your team valuable time that could be used to generate more income. As mentioned above, automating payroll processes, inventory management, and overall accounting process are ideal areas to adopt cloud accounting. 

Don’t be afraid to cut costs, or negotiate with vendors, but also always keep in mind your customer value. If you cut costs too much, you may not be able to provide the same value to your customers and end up losing more in the long run. Our best advice to our clients is to use the data they have on hand to make well-informed business decisions that can help identify areas of opportunity and in return will shape the future of your business. If you’re not sure just where to start, or are curious about how a cloud-based accounting app could save your business money, send us a message to schedule a consultation. Our clients’ success is our priority. 

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