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7 ways to reduce cost in your business

May 30, 2024

I have a weird relationship with cost reduction.

Yes, reducing cost is good... but how much and when?

It's in these in-betweens that I live as a CFO.

Today we tackle 7 ways to reduce costs in your business and try and tackle a bit of the in-betweens.

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7 ways to reduce cost in your business

If you’ve read this newsletter for any length of time, you’ve potentially sensed a disdain for the focus on cost reduction in business.

And if you sensed it… you were probably right.

It’s not that I don’t think you should look to reduce costs. It’s that I don’t think reducing costs should be permanent or recurring theme in your business. Instead, it should be viewed as a temporary measure.

I also want to shout louder, “raise your prices” or “improve your gross margins.”

Cost reduction always seems to be the first lever that gets pulled with hardly a look at the other levers. A constant focus on cutting costs can signal a struggling business, emphasizing a shrinking pie rather than a growing one.

Despite this, it’s still a really powerful tool in the toolbox of a business owner.

So, when cost reduction is the right move, how do you execute it effectively? It may seem straightforward to simply cut expenses, but that’s not always the case.

Today we’re going to explore how to effectively reduce cost without undermining confidence.

And to do that, we’re going to look at 7 strategies for cutting cost:

  1. Conduct a cost audit
  2. Optimize operational efficiencies
  3. Adjust employee authorizations
  4. Outsource non-core activities
  5. Re-negotiate contracts
  6. Leverage technology
  7. Setup a regular review

Let’s dig in.

Conduct a Cost Audit

Every time I hear the word audit, I get the chills. Going through an audit stinks. No one wants it... everyone hates it.

But don’t fear, this is a different type of audit.

This is just doing a thorough review of your expenses to identify areas you can reduce cost without too much impact to the business.

  1. Pull all transactions for the last 12 months
  2. Add 2 categorization buckets:
    1. Fixed versus variable
    2. Essential versus non-essential
  3. Identify all subscriptions or recurring expenses
  4. Go through account by account, labeling things as cut, review, or keep

We want to understand the patterns of spend and where we can save.

Once you have all transactions labeled into the three categories, negotiate the items marked as review to determine what gets cut or kept.

Whether this is done with a team or individually depends on the culture and size of your business, but I’d encourage you to include stakeholders in this process so they feel ownership.

Optimize operational efficiencies

You might be thinking “if I could be more efficient I would, goof.” Well, yes, this is often the case.

But, it’s the things you’re blind to that we can improve. The reality is we each have our strengths and areas of expertise.

Did you know about the AR software that would automate outreach and mean you don’t have to backfill for the AR Clerk position?

Or have you appropriately documented repetitive tasks? If not, how do you know you couldn’t automate something?

There are always new ways to find efficiencies and external tools can change even the most optimized systems.

So how do we do this?

  1. Ask your staff if there is anything they could implement to be more efficient. Reward them for improvements made. It won’t take many gift cards or bonuses to have everyone looking for ways to make their job more efficient.
  2. Bring in an outside expert in automation and/or processes. Get a third party with a “clean slate” and let them suggest what you should change. (see more on this in the "Leverage Technology" section)
  3. Create a process flow diagram for your major processes. Ask: is this necessary? and how could we improve it?

This may seem simplistic, but it only takes an incentive and a few small tweaks to make a big difference.

Also, know the process is never over.

Adjust employee authorizations

Whether you’re tired or lazy or have employees spending without you realizing, it doesn’t take much for employee spending to get out of control.

Revisit who you’ve authorized to do what and spot-check employee spending.

Doing this review will remind the employees that spending consciously is important and could reduce future spending.

I’m a big fan of giving the appropriate employee authorizations to empower them to make decisions… but that can only come when you have the proper structures in place.

Outsource Non-Core Activities

With the world shrinking, outsourcing has become more and more prevalent. By outsourcing support activities, you not only save money, you gain access to subject matter experts you couldn’t afford on your own.

Some common areas to outsource are accounting, IT support, marketing, and HR.

The DNA of your organization will determine which is appropriate to outsource but don’t hesitate to keep a core employee or two and outsource the rest. That employee is then responsible for managing the outsourced relationship.

As a fractional CFO, I provide support for businesses that can’t yet afford a CFO. Hiring a CFO-level talent is expensive, which often means companies “cheap out” and get a lesser talent. But by outsourcing to a firm like mine, Bison CFO, you pay less and get the highest quality talent.

It’s a win-win and something I see becoming more prevalent in the coming years. With location no longer being a factor, companies can hire people all over the world to fill these roles and have them do only exactly what they need.

Re-negotiate contracts

Most people hate conflict, but you’re paying more because of your bad contracts.

Let me guess… you last “negotiated” with your supplier when you were looking for the small batch test run you did? And have you revisited since?

Most vendors won’t come to you and offer you a better deal. You have to go to them.

Tell them about your business and what’s important to you, then ask about theirs.

What moves the needle for them? What are the “break points” for gaining efficiencies? Are there better alternatives to what you’re doing now?

Ask questions, then go in for the ask.

Tell them: “we need our cost 10% lower… how can we make that happen?”

You’d be amazed at what people will share.

Sometimes the only thing you gain is the intel, but that’s okay. You’ll be better equipped next time.

Also, have an annual conversation (at least) with your key vendors to determine where you can save and deepen your relationship.

Leverage technology

We covered this a bit in the “optimize operational efficiencies” section, but I felt it was worth its own section because of how important it is.

Consider the following:

  1. What can you automate in the business?
  2. What can you move to the cloud? Is it more or less expensive? Sometimes it can be more expenses by dollars but save you time.
  3. Are you using a project management solution? Most businesses would benefit from some sort of software to manage all their projects. By documenting this process, you save your team time and headaches… making your team operate like a machine. It’s easy to go too far down this road and make it too complicated. Keep it simple, please.
  4. Have you created communication protocols? Unclear methods of communication leads to different people doing different things. Be very clear with your team when and how to use email, slack/teams, video conferencing, and personal cell phones. Keeping communication consistent will make lookup easier in the future.
  5. Do you have access to your data? Custom reports or lack of access leads to big time investments and bad decisions. By surfacing your data and making it easier to read and interact with, you are able to operate at a higher level.

Many of these solutions will cost money up front. Don’t fall into the trap of thinking that spend is just money out the door. Consider the cost of your employees time if they continue to operate in the old paradigm.

If you’re unsure how to evaluate different softwares, check out my guide on evaluating spend softwares. While specific to spend software, it’ll help you evaluate any software.

Setup a regular review

Regular reviews help you get in rhythm of what to expect so that when costs go up you can catch it quickly.

Set a schedule for reviewing your financials and spot checking expenses.

This creates a culture that knows we’re here to find the small wins.

Every little bit counts and adds up over time.

Wrapping up

It’s important that you’re intentional about your cost, but also that you avoid fixating on them.

I’ve seen too many business owners fixate and ultimately create turnover and unneeded stress in the business.

Be fast to act on the inconsequential, but slow to act when it impacts employees day-to-day work.

Did something stick out to you today?

Reply and let me know:

  1. What has worked for you in the past?
  2. What are you going to try based on this article?

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