MLR

Cost cutting should be deliberate, not scattered

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While controlling costs is an essential part of business success, companies often undermine their success by taking scattershot action.

wrench squeezing penny

Real success in trimming costs requires a more deliberate approach.

Where are you now?

Today’s economic conditions notwithstanding, it is critical for business owners to have in-depth knowledge about their business so they can make informed decisions.

Do you have detailed financial statements? Do they provide multi-year comparisons? Do you regularly analyze those comparisons?

The first step in successfully trimming costs is developing detailed information about your expenses and related trends. Then, a careful analysis of that information will help you better prioritize where your attention should go.

To delve deeper, identify those expenses that are rising faster than sales. Reducing these expenses can make a powerful difference in your bottom line.

Consider the impact of product cost reductions when prioritizing cost-cutting efforts – a 5 percent reduction in product costs will have more impact than a 5 percent reduction in selling, general and administrative expenses.

What is the competition doing?

Benchmarking your business against other companies in your industry can help you understand how your business compares in a variety of ways, including insight into where to target cost reductions.

It isn’t always easy or inexpensive to obtain detailed and up-to-date benchmarking data. But you may be able to find valuable information through industry associations, trade publications, trade shows, academic research papers and online benchmarking repositories.

Ripe areas for reduction

It can be easy to overlook potential cost savings, particularly if you’ve been doing certain things the same way for a long time.

Here are just a few areas that may be ripe for trimming:

Insurance

If you haven’t compared insurance rates in several years, it may be time to get quotes from other providers.

If you have several policies, ask insurance companies to quote a single umbrella policy, which might lower your premium.

Consider raising your deductibles

If you carry fleet or vehicle insurance, is your coverage still appropriate for older vehicles? Are there steps you can take to lower liability risks and premiums, such as installing a fire detection or security system? Do you offer certain products or services that significantly increase your risks?

If it is possible to eliminate these products or services, you may be able to dramatically lower your premiums.

Energy costs

Multiple small moves to increase energy efficiency can add up to big savings. Here are some ideas:

  • Remove or disconnect unnecessary light fixtures.
  • Replace incandescent light bulbs with compact fluorescent light bulbs.
  • Replace or retrofit non-energy efficient light fixtures.
  • Install “occupant sensors” to automatically turn lights off and on.
  • Do not “over-light” office areas.
  • Make sure motors and motor systems are running at optimum efficiency.
  • Make sure your HVAC system is operating efficiently.
  • Repair leaks in system components such as pipes, steam traps or couplings.
  • Adjust the thermostat during unoccupied times or install a programmable thermostat.

Telecommunications

Look around for better prices on both long-distance calling and cell phone plans.
Competition and cost structures have changed significantly in recent years, creating numerous cost-saving opportunities. If you have 10 or more employees with business cell phones and are not on a corporate plan, consider a new arrangement.

Business travel costs

Controlling business travel expenses is more than just finding good deals on airfare and hotels.
Some ways to cut your budget for business travel include:

  • Centralize travel planning.
  • Create or modify your travel policy, being explicit about what is reimbursable and what is not. Establish daily limits for food, car and lodging expenses.
  • Join an airline’s frequent flyer program, ensuring that your company receives the mileage credit and ensuing benefits.

Successful cost reductions involve a careful balancing act between saving money now and preserving your competitive advantages. Striking the right balance will pay off both today and tomorrow.