Cost-cutting (also known as “cost-saving”)–for both big and small businesses–is a necessary evil that comes to the forefront periodically—either because of a down economy or because of some challenge that’s more specific to your organization, such as the loss of a major customer or contract. It would be nice if every business grew at a predictable rate and spending never got ahead of income, but the reality is that every business has to go through the cost-cutting wringer now and then.
Small businesses have a unique situation in term with cost-cutting program: first they are smaller in scale (less cost types and smaller amount, less departments and less employees of course) which should, logically, easier to be taken care in implementation. But, they also have less, perhaps no experts who lead the program (project). They can always hire expert that unfortunately expensive.
Thing is: If they can generate the right approach and implement the program carefully to saving costs, they can often minimize the damage and sometimes even turn things around with clever ideas that save costs and help revive their future prospects. That is the purpose of this post being available: to help small businesses to generate cost-cutting (cost saving) program and put it into impementation.
Focus on the Biggest Cost Categories
When managers think about ways of cutting costs, they usually focus on payroll, which upsets employees. Employees tend to see lots of other ways to save money and think that job cuts should be a last resort. The problem, however, is that payroll is a huge piece of the spending pie for most organizations.
Managers are correct to focus on this big expense category, because it’s hard to save a lot of costs by cutting expenses for things that don’t contribute much to the budget in the first place. There are more ways to take a bite out of costs than just announcing layoffs, however.
A three-step process is helpful for identifying cost savings:
- Step-1. Target the five largest categories of spending.
- Step-2. Identify the three biggest subcategories within each of those major categories.
- Step-3. Solicit employee suggestions, ask suppliers to help, and run brainstorming meetings for each of the subcategories.
These steps ensure that your effort is sharply focused where it can do the most good.
A 1 percent reduction in a minor expense will hardly make a dent in your budget, but a 1 percent reduction in a major expense will be significant on the bottom line.
It also helps to break down a broad category of costs by asking more specific questions about things that contribute to it.
Here are some typical major spending categories (which vary from business to business, of course): Energy, Facilities, Health insurance and other employee benefits, Inventories, Maintenance, Parts purchases, Salaries, Shipping, Telecommunications, Travel, Vehicles, Water (a major expense for factories that use water in production.) It also helps to break down a broad category of costs by asking more specific questions about things that contribute to it.
Take a look at your budget, rank your expense categories, and then ask pointed brainstorming questions about the biggest cost centers. If you pose the question “How can we cut costs?” and ask team members to brainstorm answers, you’ll get a lot of answers about very small expenses, such as cutting spending on staples and sticky notes. Those suggestions may be useful, but you’ll get bigger savings if you start by analyzing your budget categories and then ask for ideas about how to save money in the three to five biggest categories first.
A furniture manufacturer that used a lot of energy for air conditioning, factory production, and lighting asked, “How can we cut our energy bill by 10 percent or more?”
To give employees a personal incentive to think about the question, management added the following note: “A savings of 10 percent of our energy costs will allow us to retain 20 jobs that would otherwise have to be cut.”
A lot of good suggestions came in, and after those suggestions were implemented, the net savings was 11 percent. It pays to focus people’s creative attention on the biggest costs, because those costs are where you’ll realize the greatest savings in the shortest period.
Focus On Major Sources Of Error Or Rework
Mistakes are costly. Any errors or problems that recur are great opportunities to save money. Here are two examples of repetitive service and quality problems in organizations:
- A hotel sometimes overbooked its least-expensive rooms, forcing the front desk to give customers suites at a single-room rate.
- An eBay shipper got complaints about damaged shipments from 1 percent to 2 percent of its customers, requiring it to offer refunds or replacement products.
In each case, the fact that the same problem occurred periodically meant that the organization had an opportunity to study the root causes and eliminate the most important ones.
Any repeated error or mistake has many possible causes, but only a few of these causes will be responsible for the bulk of the problems. If you focus on eliminating one to three of the biggest causes of the error, you’ll make a big dent in the number of errors you see.
17 Cost Cutting (Cost Saving) Strategies
There’s nothing new under the sun, as the old saying goes. That’s not entirely true, of course. When it comes to cost savings, however, there probably is something old that you can try, which is why it’s particularly important to look around for approaches that have worked elsewhere.
So, before you are thinking and inventing new cost saving method, it maybe helpful to know what approach others use, adopt those that proven worked well. While you’re implementing them, you may need to start generating other approach, as alternates action plan if those approach get failed (I discuss the steps after 17 strategies I provide below)
Here are 17 strategies (approaches) I always use and recommend to clients at front before even thinking other approach—so that they don’t waste much time just to generate cost saving program:
1. Get free equipment, furniture & fixture – Periodically send requests (via e-mail and craigslist) to businesses that are moving, asking whether they’re discarding some of their furniture or equipment and would like for you to take it away. This technique is a great way to get furniture, fixtures, and equipment for free!
2. Get cheaper worker – Use lower-level work Use college and business-school interns for lower-level work. They need the résumé-building experience, and you need free (or almost-free) labor. It’s a classic win–win situation.
3. Negotiate purchase price – Call or visit all your suppliers to ask what they can do to cut their prices. It’s surprising how often you can negotiate a better price or rate just by showing up and asking.
4. Reduce numbers of suppliers and get bigger discount – Try to reduce the number of suppliers you buy from in exchange for deeper discounts and more service from the remaining ones. Shift business away from the suppliers that balk at offering deeper discounts and toward the ones that meet your pricing needs.
5. Purchase basic supplies in bulk and get better price – Consider purchasing basic supplies in bulk and storing a larger supply. If you can bypass your regular supplier and go directly to a large manufacturer, you may achieve enough savings to make it worthwhile to hold inventory (but check with your regular supplier first to see if it will match the savings).
6. Join buying cooperative – Form or join a buying cooperative in which smaller businesses pool their purchases, thereby gaining access to volume discounts and more negotiating power with suppliers.
7. Share space with one or more other businesses – Lease or sublet several of your offices to lawyers and accountants, for example, and double up in the remaining offices.
8. Ask your landlord for a rent reduction – If the market is soft in your area, and you’ve been a good tenant, the landlord may be willing to reconsider the rent rather than lose you.
9. Acquire phone number from those that bankrupts – If your business has many local competitors, watch for ones that go out of business, and acquire their phone numbers from them. You’ll get some of their repeat business when customers call the old phone number to place an order. It’s a remarkably inexpensive and effective way to find new customers! (Note: avoid those that have legal and customer issues in the past.)
10. Do self telecommuters – Use telecommuters to do self-managed jobs such as Web design, engineering, and writing. If you have people come in only half-time, you can reduce the number of offices you provide by half!
11. Outsource – Outsource functions that are generic, including basic payroll, accounting, and data entry.
12. Shop lower credit card rate – Check your rates for credit card transactions and online merchant banking, and shop around for better rates.
13. Return slow-moving inventories – Identify inventories that aren’t turning over, and ask the suppliers to take back some of these supplies or products at cost. Getting these materials off your books will put cash back into your account.
14. Use only reliable supplier – Cut your inventories by working with suppliers that can guarantee quick, reliable delivery so that you don’t have to worry about running out. Inventories are a major hidden cost center in many businesses.
15. Eliminate use of ink and papers – Find solid information on how to implement “paperless approach” from other companies that succeed the implementation. Start to implement “paperless approach soon.” Of course, there may still some minor use of paper print (e.g. legal documents, check print and the like). To keep it minimal, save ink and toner in your printers by being more concise and by using smaller fonts that use less ink. Thin, unadorned fonts like Arial and Lucida use slightly less ink than traditional fonts do. New typefaces such as Ecofont use the least possible ink to make a clearly legible letter. My favorite, however, is Arial Narrow, which uses less ink and, by compressing the letters slightly, also saves paper.
16. Limit telephone use – Telephone conversations are important for customer service, sales, and problem-solving, but employees probably overuse the phones for other purposes. Switch to using e-mail as much as possible. It’s faster and far cheaper than talking.
17. Turn the thermometer up and down – If you relax the dress code enough that people can layer up or layer down for the weather, you can allow the office temperature to fluctuate more with the ambient temperature. Allowing a seasonal temperature range of 12 degrees Fahrenheit can save you 10 percent to 15 percent of your annual heating and air conditioning costs.
Do these cost-saving ideas get you thinking? I find that if I seed a cost-cutting session with some ideas from earlier brainstorms, the new group gets up to speed and produces helpful suggestions much more quickly and easily. (I discuss steps you need to take below)
Using Savings-Creation Methods from Idea to Implementation
Savings creation is what I call the special toolbox of cost-cutting-oriented brainstorming, idea review, and implementation of methods that individuals and groups can use to reduce the budget and make ends meet. This section contains some of my favorites.
STEP-1. Find out where the losses really are – It’s easy to see if your overall budget is in the red, but it’s far harder to know exactly where those losses come from. Cost accounting involves the allocation of various costs to specific products or processes, and it’s a tricky thing to do well. Sometimes, the allocation formulas used in your accounting system are inaccurate and don’t tell you where you’re really losing and making money. Take some time to examine your accounting, and research how costs are—and should be—allocated. You may find that a location, route, product, or process is less profitable in fact than it looks on paper, while another is more profitable. Your cost-accounting research will help you make the right cuts.
I worked with a freight transportation company to identify which of its hundreds of trucking routes were making and losing money. I discovered that some of the company’s figures were off and that certain routes were losing more money than anyone realized. When we improved the cost accounting, it became obvious that certain routes needed to be cut and others needed to be priced higher to make the overall operation more profitable.
STEP-2. Generate effective cost-cutting ideas – Set the tone for a cost-reduction brainstorm by emphasizing the shared benefits and encouraging people not to be defensive or protective of their own turf. Point out that it’s better to cut costs in your own area or department than to have others do it, because you have more creative control by making the cuts yourself and can minimize the negative effects. Build buy-in by discussing the benefits of a participatory approach to cost-cutting versus a top-down one. People get very serious and conservative when it comes to cost-cutting, and they overlook the more innovative approaches. Point out to the group that simple cost-cutting is a win–lose equation: All it does is save money by taking things away. When you hold a cost-cutting brainstorm, I recommend starting with a review of really successful cost cuts (ones in which an innovation helped cut costs while improving the way that the business works). A few inspiring examples will help show the team what you mean by win–win innovations. When your group runs out of ideas (as it will after the first hour or so), start another round of ideas by challenging them to think about ways to:
- Pool resources with others.
- Reduce steps in business processes.
- Switch to less-expensive alternatives.
- Be more flexible about time or place.
- Get rid of anything that isn’t used frequently.
- Get rid of lines of business that don’t make a profit.
- Outsource more services and functions.
These seven general strategies are extremely powerful and can produce substantial cost savings. If you can come up with even one idea worth implementing in each of these categories, you’ll cut costs substantially — perhaps by as much as 25 percent to 30 percent.
STEP-3. Evaluate cost-cutting proposals – When you’ve got a good list of possible ways of cutting costs, evaluate each one by using three criteria:
- How much will the cut save? Assigning a financial value helps you decide which ones should be implemented first.
- What problems will the cut create? Some cost-saving ideas are relatively pain free, but others cause inconveniences or may even make other costs rise. Consider the effect before implementing any idea.
- How will the cut affect quality? Make sure that you’re not undercutting your product or service quality with the cost reduction; otherwise, the cut will come back to haunt you in the form of falling sales.
These three criteria give you a quick initial screening. After that screening, you can further analyze the ideas or proposals that look best based on these questions:
- How long will it take to implement the idea and see real savings from it? If it takes too long, you may do better to focus on something that has a quicker payoff.
- Do we have the expertise and time to implement the idea now? Avoid proposals that require expensive extra effort or hired expertise.
- Is the proposal focusing on a function, division, product, or location that loses so much money that we may simply want to shut it down? There’s no point in making minor cuts in something that’s a candidate for elimination; you may as well make the big cut right away.
STEP-4. Implement cost savings – Implementing cost savings is not very different from implementing any innovation, but some things about cost savings differ. Cost savings can easily feel like a loss, for example, producing pushback and resistance. Also, businesses are complex systems in which everything is interconnected, so it’s not always easy to predict the effects of cost cuts. Following are some tips to help you implement your creative cost savings:
- Inform those who will be most affected – Make sure that you inform those affected by the cuts fully and clearly. Tell them exactly how they will be affected so they won’t be left wondering and listening to rumors.
- Observe the consequences – Often, it’s not the quality of the cost-saving idea itself but the quality of the implementation that determines whether you succeed or fail. The biggest problem that most cost-saving plans run into is unintended consequences — outcomes that weren’t part of the original plan. Unintended consequences can be good or bad, actually, but the bad ones are the ones to watch out for. Here are the three main types of unintended consequences: (1) Positive unexpected benefits (e.g. greater savings than anticipated—also called “windfalls”); (2) Negative side effects (e.g. drop in productivity as an unintended result of cuts in payroll); and (3) Perverse effects—opposite results from what was expected
- Filing weekly progress reports – Because cost-saving initiatives are outside the regular work of the business, they tend not to be tracked or accounted for very rigorously, which means that they may not be completed as thoroughly as they should be. To ensure follow-through and successful completion, keep central records on each and every cost-saving initiative. Have each cost-saving team report in every week to make sure that no projects fall though the cracks. Also, collect details on what’s done and how much is saved.
- Ask teams to document what they learned – At the end of each project, ask the implementation team to write a short lessons-learned memo to document any insights they gained, including insights about how to control costs (which might include further suggestions) and how to manage cost-control projects in the future. Documentation allows you to learn from the experience and also to ensure accountability.
Avoiding Pessimism About Future As Side-effect of Cost Cutting
One thing’s certain: If times are bad now, there’s a good chance that things will be better in the future. Good and bad times tend to alternate, so optimism is the most logical viewpoint when times are bad. Humans aren’t logical beings all the time, of course, and our reactions to bad news are usually more emotional than rational. Still, it’s a big help to remind yourself — and others — that it’s reasonable to expect things to get better in the future.
A pessimistic attitude makes you feel that you can’t do anything about the current problems. Nothing could be farther from the truth! A tough problem is a great opportunity for innovation.
Before making any major cuts (such as cutting the payroll or closing facilities), take a day to assemble a team of your best and brightest employees or friends and associates, and ask them to brainstorm on this theme:
Is there some way to solve our cash-flow problems by boosting revenue rather than making drastic cuts?
Sometimes, you can find innovative ways of adding to the bottom line that make cost-cutting irrelevant.
An auto parts supplier was struggling with reduced wholesale business after a nearby dealership closed. In a brainstorming session, an employee who commuted from a distant town mentioned hearing that a supplier that served a neighboring region was closing. Upon further research, the rumor proved to be true, and the employees agreed to take turns making sales calls and working extra hours to expand into that neighboring territory.
Within six months, the company had acquired several dozen additional customers — auto repair shops that ordered parts daily — and had a profitable new route for which it hired a new driver. No jobs were lost and one was gained through the use of a how-can-we-grow-revenue brainstorming session.