There are a variety of tactics you can employ to reduce expenses in your business and prepare for unforeseen costs that crop up over the course of the year. Maintaining tight control over both fixed and variable expenses is an essential part of this process. But you also need to have a plan in place and leverage the power of cloud technology to achieve maximum results.
1. Put together a plan
You need to evaluate where your business is now and where you want to take it in the future. A well thought-out road map is essential to properly forecast expenses and provide for contingencies. For instance, if you intend to pursue a new market or invest in a new project, you have to build the related expenses into your forecast.
2. Monitor expenses regularly
You should understand your historic costs before planning for the future. This requires gathering data in an effective and efficient way. Reviewing your company’s financial statements on a monthly basis would allow you to see all your expenses by category for the most recent month. Always remember that tracking your costs shouldn’t be an afterthought, it needs to be an integral part of your ongoing operations.
3. Industry benchmarking
Establish metrics that are meaningful to your business and comparable to those used by other companies in your industry. If you see you’re spending more in certain categories, then drill down, investigate why and take appropriate action to reduce those costs to industry norms.
4. Understand your variable costs
Review your company’s past variable expenses and calculate what percentage of sales they represent. Historic percentages provide both a good indicator of potential future costs and a benchmark to use in keeping those costs in line with selling activities.
Variable costs rise when sales and production go up and they fall when sales and production volumes go down. In fact, variable costs and sales and production volumes should rise and fall by the same percentage. Direct labour costs, sales commission, and raw materials are examples of variable costs.
Variable costs appear under Cost of Goods Sold or Cost of Sales on a company’s Income Statement. It is important for business owners to understand the dynamics of these costs to stay competitive.
5. Track fixed costs diligently
People tend to become complacent about fixed costs because they are generally recurring and often reflect long-standing relationships with suppliers. But you should periodically test the market to see if you can get a better deal from competing suppliers.
It’s good practice to get two or three quotes. Whether it’s by putting out a request for proposal or a less formal method, it’s important to send out the message that you are always watching your costs.
Fixed costs are costs that do not change when sales or production volumes increase or decrease. This is because they are not directly associated with the production of goods or delivery of services. As a result, fixed costs are considered to be indirect costs.
Fixed costs can include property taxes, rent, salaries and the cost of benefits for non-sales and management personnel. In most cases, fixed and semi-variable costs appear together on a company’s Income Statement as Operating Expenses.
It is important for business owners to understand the costs they incur so they can manage their expenses effectively. As a general rule, higher sales and production volumes lead to higher total costs, but because some costs are fixed, the percentage increase in total costs will be less than the percentage increase in sales and production.
6. Invest in technology
You should regularly explore new technologies that may help your business improve efficiency, increase productivity and reduce costs. For example, many companies are now using cloud computing systems as opposed to in-house hardware that can be relatively expensive to buy and maintain. From a financial management standpoint, most businesses use Quickbooks Online to manage their bookkeeping records and Hubdoc to manage their bills and receipts.
When it comes to reduce expenses in your business, it boils down to three things: 1) careful planning; 2) making tweaks and adjustments as they’re needed; and 3) rolling up your sleeves to do the necessary and ongoing hard work to achieve the goal.