23 Tips to Reduce Your Biggest Business Expenses
For most businesses, the five greatest business expenses are: Staff, physical location, capital equipment, development costs, and Cost of Goods Sold (aka: Inventory).
Here is a quick list of 23 tips to control these expenses so that you can enhance your profitability.
1. Most of your team don’t really understand the “full” amount you are paying them. So twice a year give them a “Full Benefits Report” that lays out their salary, bonuses, employer share of payroll taxes and HR compliance costs, and the dollar value any benefits they receive.
2. Create a culture where compensation is tied to value created for the company, not to time served.
3. Communicate clearly and far in advance as to progress towards individual and team bonuses. It’s your job to make sure that your team sees the direct, causal connection between the results they and the company generate and the bonus status they are working towards.
4. For creative and interesting work let intrinsic rewards rule. Be wary of over-incentivizing for specific behaviors. Autonomy, challenge, and pride are multiple more powerful and enduring rewards than an outside piecework bonus structure for expert work.
5. Regularly review your administrative and operational staff levels closely. Most service and administrative departments can be cut by 1 in 4 with no impact on quality of work. Many can handle 1 in 3 cut with no significant negative impact.
6. Stop “make work”. Make it a part of your culture to scrutinize what you do and question, challenge, and eliminate low value outputs. This includes reports that no one actually uses; product or service lines that are low (or even negative margin) that you keep going because you feel you “have to”; etc.
7. Cut wasteful meetings (or at least cut in time and people involved in half). After email, poorly planned and run meetings are the scourge of productivity. Make it clear that every meeting in your company needs three things: a) An agenda laying out the reason for the meeting, what you expect and want to accomplish out of the meeting, and the flow of how the meeting will run; b) A skeptical eye towards who should and should not be at that meeting (you can always send out a recap to keep people in the know); c) A clear leader for that meeting tasked to keep the focus clear and guard against tangential or non-productive behaviors.
8. Get over your fear of firing people (low performers cost too much to carry.) If you’ve coached them, trained them, and given them the opportunities to flourish, but they haven’t made the grade, you need to let them go so that you can find someone else who can give your business the performance it needs.
9. Hire better talent than you think you can afford—use every new hire as an opportunity to upgrade your talent. One “A” player may be worth 1.5-2 “B” players, and 5 or more “C” players, and yet this A player may only cost 10-25 percent more.
10. Cut back on the physical space you use. This could mean subleasing some of your extra space that you’ve been saving and paying for “just in case you need it later.” This could mean letting some or all of your team work part (or gulp—full time) remotely. This could also mean reconfiguring your workspace so that you don’t need to increase it as you grow.
11. Renegotiate with your landlord. You’ll never get what you don’t ask for. Create clear options for other space you could lease and have a heart to heart with your landlord about reducing your lease rate. Even if they say no you can always give them a fallback request to give you an option to extend your lease without an increase in rent.
12. Scrutinize all capital purchases and investments. What’s your “ROI”? Will it allow you to increase production without increasing head count? Will it allow you to increase production while lowering headcount? Be wary of your engineering or other “technical” departments asking for the latest “X”, sometimes their love of the gizmo or technology will bias their perspective. Also make sure to factor in the “after purchase” costs of your new capital purchase. Your ROI needs to be based on the true cost of owning and operating your new capital purchase.
13. Consider leasing versus owning. You can often lower your cost. Consider negotiating an option to purchase the equipment at some later date. I’ve used this tactic to buy large equipment with amazing financing (the lease) and a reasonable option price. Since I was the one who operated and maintained the equipment along the way I was confident the machines were wall cared for and had real value.
14. Consider buying “off-the-shelf” versus designing or developing a tool (e.g. software, machine, etc.) from scratch. Unless you are in the business of designing exactly those types of tools you’ll almost always find your estimates of the cost to build from scratch are hundreds of percent too low. Plus, you won’t have the install base to update that tool, for example with later software releases, at a cost anywhere as close to a third party company who can amortize these ongoing waves of new versions over a much larger user base.
15. Negotiate hard. Take the time to plan out your negotiation strategically. Create competition for your dollars. Create a list of concessions you want, with extras for you to trade off. Research the market to better understand the best deal you can expect. Even hire an experienced negotiator to help you make the purchase on the best price and terms you can. If the asset you’re buying for your business is large enough, the ROI on your negotiation work can be immense.
16. With R & D be careful to spread your resources too wide. Often by narrowing your R&D focus a smaller firm can create the breakout product or service they were looking for.
17. Beware “hidden” R & D costs for pet projects and bright shiny opportunities that don’t match up with your company’s strategic plan.
18. R & D is not just a tech or pharmaceutical company line item. If you work on new ways to create a product or service that you will one day, “down the road” sell to the market, YOU have R & D. Be strategic about where you invest your company’s dollars.
19. Get clear on all the costs of inventory: cost of capital; storage; insurance; etc. This will help you make informed stocking levels.
20. Consider selling off or writing off old inventory. Why pay to store stuff you really don’t have a use for. Free up the space and cash tied up in that old inventory. Sell it; donate it; scrape it.
21. Set optimal inventory levels and stick to them. Constantly be on the lookout for ways to safely reduce your inventory levels.
22. Improve reliability and speed of your supply chain and production and you can safely reduce your inventory levels and free up working capital.
23. Speed up your production cycle. This lowers your “unit overhead burden”.
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