In the current economy, it’s become more of a priority for businesses to manage their budgets closely. But it takes time and effort to find ways to reduce costs on not only the big ticket items but also on the numerous small items that slowly keep chipping away at our bottom line. So, what are the most efficient strategies for identifying and reducing waste?
Let’s start with evaluating the ROI or return on investment for each expenditure. This is your opportunity to think like a start-up or new business. If you were launching today, what would you change? Look at all your vendors, especially the long-term commitments or contracts. Will they consider renegotiating. Is there something you can do without and still grow revenue? Is leasing an option? Or is buying the best option?
Look at the historical Cost of Good Sold (COGS) and compare what 2011 COGS were compared to 2010 and 2009. What were the increases and how do they compare to the cost of living increases. How does your company compare with others in your industry; is the percentage of COGS higher at your company or lower? What can you do to negotiate lower prices from your vendors? Maybe purchase commitment of X to hold prices steady at Y? A book recommendation for any business owner who wants to gain a better understanding of his/her financials, understanding where and how to reduce costs and take advantage of opportunities to improve the bottom line is: Managing By The Numbers by Chuck Kremer, Ron Rizzuto, and John Case.
Looking at your overhead in general is one of the best places to start. Remember, don’t get too crazy and decide to cut everything by 10% across the board. Take a hard look at the marketing and sales expenses before randomly cutting these. It doesn’t mean that you can’t refine your marketing strategies to reach a more targeted audience or trying to optimize each message or time that you communicate with a customer. Remember random, deep or reactive cuts to anything associated with an activity that is REVENUE PRODUCING could be “Life Threatening” to the business. The best area to start looking for waste is in the General & Admin.(G&A) expenses. They typically make up a larger percentage of the total expenses and are comprised of a variety of diverse costs like rent, all office expenses, salaries of office personnel, etc. and they are not costs directly associated with REVENUE GENERATING activity.
Lastly, seeking input from staff as you refine your budget and reduce unnecessary expenses is a must. Often, it’s the people closest to the day-to-day operation of a business that can be the best waste-reducing advocates. And they need to buy in to the process anyway, so why not bring them into the process in the beginning. Run a contest and reward the employee(s) who have the best suggestions for streamlining processes and reducing waste. Or consider putting together an efficiency committee and empower them to conduct an efficiency audit to review and vet each cost cutting/waste reducing opportunity and bring only the best options to you for final approval.
LEAN and Healthy companies will be in a position to take advantage of growth opportunities that can be the competitive advantage to keep them ahead of the curve.