7 Secrets For Reducing Business Costs

Elena Hudgens
By Elena Hudgens 9 Min Read

How can you judge the performance of your business? What strategies can you use to boost growth and expansion? If increasing sales revenue is key to achieving your business goals, cutting down on costs is just as important.

The key to expanding and sustaining a small business is striking a balance between revenues and expenses, increasing your profit margin to operate at the lowest costs possible.

Of course, every business must spend money to generate more cash. But, the question then arises, how can you ensure that you are not overspending? Here are the seven secrets for reducing business costs. Keep reading.

Plan Ahead

Planning can make all the difference in how your business controls expenses. Budget planning is a critical element of the planning process, which involves gathering financial data, industry analysis, and forecasts. You must keep your strategic business plans in mind while building a budget and valuable business data. 

A budget for a small business is dynamic, and you can use it to estimate your expected revenue and costs. It provides vital information to identify available funds and estimate costs and revenue. 

To ensure you don’t spend money on unnecessary things, you should consistently refer to your budget and compare the forecasted amounts against actual figures. This way, you can make adjustments in advance.

Planning is essential for businesses that rely on seasonal revenue during specific months. In this case, you should have a strategy for distributing costs throughout the year to maximize revenues.

Here’s a simple budget-making process for a small business;

  • Adding up your income sources is a great way to start. Your income depends on your business model but will give you a clear picture of total inflows.
  • Determine your fixed(constant) and variable costs. Fixed costs include equipment leasing, whereas variable expenses include utilities such as gas and electricity. 
  • Calculate your surplus and deficit. 

Track Your Expenses

You need to understand all the costs involved in running your business by reviewing the historical trends. Tracking costs should not be an afterthought but an essential part of your budgeting process. 

You can benchmark with other businesses in the same industry, state, or city and compare your spending in different categories. After that, drill down and investigate why your overspending is more than industry norms.

For a small business, you don’t need complicated accounting software to track your expenses, and you can use a simple excel sheet and upgrade over time.

One main hindrance to tracking your business expenses is mixing them with your personal expenses. On the surface, both accounts appear similar; however, having a separate account for business makes it easier to track your expenses. Then, you can quickly evaluate your numbers, decide where to invest your money, and make plans regarding business financing. 

Analyze Your Credit Card Spending

Have you recently looked at your credit card spending? If you haven’t, this could be the right time. The advantage of credit cards is that you can borrow against your cash limit to finance short-term business expenses. Credit cards are not necessarily bad if you don’t overspend your limit.

A credit card inquiry and application can trigger credit history, lowering your credit score. If you fail to pay your bills, your account will default, and you’ll have to pay late fees and higher interest. Eventually, it can harm your credit score and affect your business’s future borrowing ability.  

If you already have a credit card, it’s crucial to analyze your spending to see whether it aligns with your business budget. Be sure not to exceed the 30% credit limit utilization rule, as doing so will spin your business into a debt trap. 

If it’s time to apply for credit card, shop around, compare different providers and review reward programs to determine the best option for your business. Additionally, set bill reminders to avoid missing your payments.

Consider Refurbished or Second-hand Office Equipment

It’s not always a must to purchase brand-new assets, especially if there are numerous opportunities to buy refurbished items at a low cost. Typically, equipment purchase is a significant cost for many businesses and more if you acquire it on debt. 

The depreciation of the assets and interest payable to banks or lenders eat your revenue. Be sure to look for secondhand items, which often turn out to be as good as new. 

For example, assets like computers, office furniture, and monitors come at a discount; therefore, you can get them at lower costs than ordering new items.

Still, if you have business ideas or projects that will expand your business, you can consider leasing equipment and avoid significant purchases that may impact your cash flow. But this should only be a short-term solution because asset purchase is cheaper than leasing in the long term.

A perfect example is where you buy a piece of equipment at around $50,000 by putting a 25% down payment of $12,500 and paying off the outstanding balance at an interest of four yearly payments of $12,000. When you add up the down payment and installments payable (12500 +12000*4), you get 60,500 as the total cost of the equipment in 8 years. You can then decide to sell it as a write-off or scrap.

The next alternative is to lease the equipment at $8,500 every year. After eight years, the total leasing cost will be around $68,000, which is higher than purchasing the equipment. Here, you have no option of selling off the equipment but will return it to the owner after the expiry of the lease term.

These are just assumptions and don’t reflect the actual cost of purchasing equipment. Nonetheless, the two examples show that purchasing an asset for long-term use is cheaper than leasing. 

Consider Remote Office For Staff

If your business is majorly in the online service sector, remote working can dramatically reduce costs related to electricity, computers, heating, air conditioning, phones, and other office necessities. It can also save time spent by employees commuting to work. A recent study from Global Workplace Analytics revealed that businesses could save around $11,000 per employee working at least three days a week remotely.

For example, a plumbing designer living in Fort Worth, Texas, spends up to 1 hour daily to get to work in Dallas. If he opts to fire up his computer and work at home, he’ll save time for other work-related projects. 

The largest holdback for businesses is lack of supervision which may lead to underperformance on the part of the employees. However, if every employee is aware of their Key Performance Indicators (KPIs), they can work towards achieving their targets and that of the business.  

Conclusion

Keeping our costs low is one way to increase your revenue. Applying the above cost reduction solution can effectively expand your margin and benefit your business in many ways.

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Posted by Elena Hudgens
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Elena Hudgens is an entrepreneur with 10+ years of experience. She started her journey by building her own e-commerce website on Shopify and turned her $1000 savings to millions in just 2 years. Soon she started different ventures in which she failed and succeeded. And now, she's on a mission to help other entrepreneurs with her life and business lessons.
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