Cost Reduction Strategies That Boost Profits & Competitiveness!

These exact cost saving, profit boosting strategies and tactics have been used to slash the fat and up the bottom line at multi-billion dollar revenue generating corporations, and can give small businesses owners the edge…

PLUS – where to find interest free small business loans.

“Every successful entrepreneur has honed their marketing strategy, brand positioning, the quality, performance and unit selling price of their product. They have made sure that their website is slick and attractive and keeps building traffic to maximize sales. As a result they can sit back and watch the cash roll in”

 

Sounds idyllic doesn’t it? What’s wrong with that scenario? Nothing if you are happy with your current profit margins. However if you could add 10% or more to your profit margin and improve your competitiveness with good housekeeping and minimal effort doesn’t that sound better?

 

So where is this extra profit going to come from? The answer is simple it’s your costs. Whether raw materials, staff, marketing or office overheads. When times are good and in a rising market it’s easy to “take your eye off the ball” when it comes to costs and you don’t even see it eating in to your profit!

 

Cost reduction strategies should be geared towards generating substantial revenue from pre-existing elements without making additional sales. This process identifies profitable procedures already in place and optimizes procedures to maximize profitability. Cost reduction enables businesses to identify their current needs, forecast future sales, and understand the factors that help or prevent their products from selling. A successful cost reduction strategy includes the entire organization and all levels of management.

 

A Warning – 3 mistakes to avoid when trying to reduce your costs!!

1. Reducing or eliminating your sales team

2. Reducing or eliminating your marketing budget

3. Reducing or eliminating systems or technology that make your operation more efficient

Often entrepreneurs make fatal mistakes when trying to reduce costs. They grow frustrated with weak sales numbers and/or a marketing plan that they don’t feel is working, so they have a knee jerk reaction and let salespeople go and drastically reduce the marketing budget. This is short-sighted because they are closing down their principal source of cash flow. A properly implemented marketing strategy generates quality leads for salespeople. Capable salespeople generate new revenue by converting leads into customers.

 

Entrepreneurs, you must protect your investment in profit producers wherever and whenever possible!

“Whatever you do; don’t reduce service or value and increase pricing; giving loyal customers less for more money; it’s the fastest way to tank your business”

10 tips to reduce your costs and ramp up your profit

1. There are no “sacred cows”!

Don’t be afraid to look at every aspect of your business not just material costs but also processes. Increasing efficiency is as good reducing your base costs.  It’s no good saying “we can’t change that” or “we have always done it like that” because if you do you will stay exactly where you are. Sometimes hard decisions will need to be made especially if they involve employees or terminating agreements with longstanding suppliers.

2. Re-engineer Your Business Processes

Re-engineering is a complete redesign of process with an emphasis on finding creative new ways to accomplish an objective. The aim of business process re-engineering is to improve the key business process in an organization by focusing on simplification, cost reduction, improved quality and enhanced customer satisfaction. For example if you can improve your website to process orders 10% faster by eliminating one stage then it means that you can effectively get the orders through the system and out of the door quicker and improve cash flow.

3. Involve your staff and management teams in the review process

Top view of working business group sitting at meetingUsing the Total Quality Management (TQM) approach, all business functions from production staff to accountants etc. are involved in a process of continuous quality improvement. They should meet regularly, have brainstorming sessions and be challenged to reduce costs. This team should list out all potential initiatives and this list should be maintained even if some do not come to fruition. This provides an incentive.

Ask for Employee Suggestions! Employee suggestions play a vital role in cost reduction and increasing productivity because employees have more experience regarding daily operations in a business. Every suggestion that your business implements improves your business in some way. Performance may be improved, customer satisfaction may increase, costs reduce, or some other positive impact improves your business in some way. The more ideas you implement the more your business will improve. These suggestions will add up over time and can be used as a competitive advantage.

Another way to really focus your employees on saving cost is to consider paying bonuses based on achieving the overall company cost reduction targets.

4. Track and report your successes!

Make sure that you can quantify the impact on your costs of all these initiatives and report it monthly. The best approach is quantifying the reduction for each initiative in the current financial year and then next two financial years. Once this gains some momentum you should really see some impressive numbers.

5. Supply of raw materials on or better still “Just in” Time

Getting your raw materials to warehouse on time to meet production is vital. Too much and not only could you run out space but you will have valuable cash tied up unnecessarily. Too little and you might not be able to fulfill orders, impact of revenue and also reduce customer satisfaction   The main aim of a  Just-In-Time (JIT) System is to produce the required items, at the required quality (not reduced) and quantity, at the precise time they are required. It requires the purchasing team to work closely with the production team and most importantly with suppliers to ensure deliveries. The JIT system is probably one of the most important systems in mass production line industries such as the car and mobile phone manufacturing.

6. Share the Success

In the article “8 Strategies To Engage Staff & Maximize Profits” one of the key strategies was the need to share information with your employees “Let your employees know what’s happening in “their” company. Share the company results and figures in an honest and truthful way. This will develop a greater sense of belong and ownership of the company’s performance”. By doing this you will embed this cost reduction ethos in your business. Cost reduction goals can easily be incorporated and aligned with your engagement strategy!

7. Collaborate with Suppliers

Your suppliers can be your best allies when implementing cost reduction strategies within your organization. Consider a variety of programs, such as vendor managed inventory systems (VIM), vendor stocking programs (VSP), and common supplier joint procurement policies. Choosing a VSP reduces stock costs for less popular items and increases supplier reliability and dependency. Alleviate the nightmare of managing inventory by giving the responsibility to the vendor, which reduces your inventory and related expenses.

8. Eliminate Paper Flow

Another great way to improve productivity while lowering costs is to eliminate paper flow. The average office worker prints 10,000 sheets of paper a year. The best tactic is to place all documents online for employees to download and read.  Also, instruct all employees not to print e-mails and other unnecessary documents that will usually end up in the bin after a quick review. Set all printers to print double sided and avoid colour copying unless absolutely.

9. Re-tender all your suppliers and consolidate your purchasing power

Every business will have many suppliers for raw materials, water, electricity, paper, IT hardware, software and support, office furniture, office cleaning, distribution & delivery  (if not in house) , company vehicles and even coffee. This list could go on and on. Firstly establish what you buy and which have the potential for the biggest saving. For example in the production of your product you buy 1,000,000 Type A widgets per year at $1 each from supplier X. By going out to the market and tendering to new suppliers if you can now buy them for $ 0.95 then you have just saved yourself $50,000 a year every year! Don’t be afraid to try new suppliers.

Also try consolidating your purchasing power. Can your new supplier also supply another of your raw materials is there a financial benefit to you if you switch to them it maybe additional discount or reduced unit cost as they are getting increased turnover and benefits in combined deliveries.

This consolidation can also be applied to multi location businesses. If you have 25 plants each buying 1,000,000 Type A widgets per year at $1 from various suppliers, then by combining and buying them under one order or national agreement then you may reduce the cost to $0.90 then across your 25 plants you have just saved your company $2,500,000 a year every year!

10. Managing Your Business debt

Young couple calculating budgetFrom the housing market to Main Street, cash flow poor individuals and entrepreneurs are  struggling to keep up with borrowed credit have increasingly found that traditional refinancing options are harder and harder to come by.

For small business owners in particular, the cost of repaying business loans can amount to thousands of dollars each month. Combine this with other business operating expenses and even a slight decrease in sales can have a devastating impact on their financial health.

So when business survival overtakes any focus on business growth, what options are available to small business owners?

Government-Backed Options for Managing Business Debt

Money tree with business people trying to collect billsUnder the provision of American Recovery and Reinvestment Act (ARRA), the government has been sending out lifelines to small business struggling to manage business debt.

While these initiatives administered by the Small Business Administration (SBA) have not grabbed the headlines as much as the TARP program provisions for corporate bailouts, there are genuine options that small business owners struggling with debt should be aware of.

PLUS: Read the report on Crowdfunding for small business

Some government-backed initiatives that can help small business owners address the challenges of mounting debt and financial hardship are:

1. The ARC Loan Program Interest Free Loan for Debt Repayment

The American Recovery Capital (ARC) Loan Program provides interest free loans of up to $35,000 to small businesses for the purpose of making principal and interest payments on existing, qualifying small business loans for up to six months. The loan is interest free and 100% guaranteed by the SBA. No collateral is needed and there are no fees associated with the loan.

2. SBA 504 Loan Program Changes Existing Debt Refinancing for Expanding Businesses

Recent modifications to the SBAs 504 Certified Development Company Loan Program  which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings will permanently allow small business owners refinance existing loans.

3. Floor Plan Refinancing for Struggling Car, RV, and Boat Dealerships

Few industries were hit so prolifically as the auto industry. On July 1, 2009, the SBA extended an olive branch by offering government guaranteed loans to help dealers finance inventory for eligible auto, RV, boat and other dealerships.

The Dealer Floor Plan Financing Program (DFP) can offer some dealerships the opportunity to get through tough economic times by allowing them to keep their inventory and cash flow intact, as well as save the jobs these small businesses provide.

Talk to your local SBA representative for more information about all potential schemes, eligibility, full details and how these programs can help your business. See SBAs Recovery Act Portal

Now what?

If you don’t know where to begin cutting costs or dont have the time to perform a thorough cost reduction analysis but you recognize cost cutting is critically important to your bottom line or it has been on your to do list for a long time, but it never seems to get done because other responsibilities dominate your time then STOP right now. Make the time or delegate this to your management team but don’t let it drift any longer or you could find yourself un-competitive with stretched cash flow over extended loans  and worst case out of business!

For smaller shops consider bringing in a consultant for a few hours to analyse your operations and suggest, and perhaps even implement changes. Freelance small business development consultants can be found on oDesk or LinkedIn, while real estate companies can turn to firms like Office Snap Inc. out of Naples, FL.

Craig Murphy Profile Pic G-Code MagazineAbout the Author: Craig Murphy

Commercial Director for one of the UK’s largest home builders, angel investor and co-founder of G-Code Magazine, Craig brings a vast amount of real estate and financial knowledge to the team and content.

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