Perhaps the most important rule of business is that maximizing profits requires increasing revenues while reducing business costs. Simple enough to say but difficult to implement especially when you are an emerging growth company (such as our firm, Newport Board Group, specializes in advising) and you lack strong pricing and purchasing power. As revenues increase, the tendency of businesses is to add workers, acquire new technology, and increase inventories. However, many companies grow themselves out of business by diverting cash into fixed assets and inventory investments in anticipation of expanding sales.
One way to avoid this situation is to reduce and control non-strategic costs. Through technology and the emergence of service providers that specialize in doing your non-core activities better than you can, companies can reduce costs, increase efficiencies, and increase profits to be in a better position to deal with the inevitable cyclical economic downturn.
The Top 10 Ways To Reduce Business Costs
1. Manufacturing
The economics have changed substantially between producing goods in China and in the United States. A recent study indicated that offshore manufacturing companies are looking at 15 to 20 percent average wage increases and will reach wage parity with the United States by 2017. Energy costs outside the country are growing quickly as China converts from coal to natural gas.
Consider the option to bring at least some of your manufacturing back to the U.S. to reduce costs and better manage operations without the problems of different time zones, cultural barriers, and high freight and inventory investment. The relative costs have almost come full circle.
2. Freight and Packaging
If your business involves shipping goods, look at your trucking or small package vendor landscape for cost savings. Make sure you are organizing the business to take full advantage of full truckloads on the outbound. First, take advantage of the savings you can achieve when you meet the minimum values for shipping levels to customers. Look at how you can recover shipping charges from the customer.
3. Finance and Accounting
The cloud simplifies outsourcing of accounting activities to service providers, making cost reductions easier to achieve. This makes a lot of sense if you are scaling up your business and don’t want to invest in hiring accountants on staff who can develop insightful reporting or make sure you are GAAP compliant.
4. Human Resources
A Professional Employee Organization (PEO) can help process your payroll and offer your employees a better selection of benefits. By pooling with other companies through a PEO, you can get significant discounts on the cost of benefits. Another advantage: the PEO has experts who can take responsibility for the maze of changing HR regulatory issues including ACA compliance.
5. Legal Fees
If your company has to deal with critical issues like litigation, patents, a potential IPO introduction, or corporate reorganization, you will need a top notch lawyer. That specialist will be housed in all likelihood in a top law firm and their hourly charge rates are significant. Don’t, however, fall into the trap that you need to pay those rates for ordinary corporate counsel work. Legal fees are negotiable and many firms will cap their fees for basic corporate work or accept a fixed monthly retainer for basic legal services.
6. Bank Fees
If you are a small- or medium-sized company and working with one of the big national banks, you need to ask yourself why. These large banks are loaded with professionals to help large companies with complex international transactions, technical work such as risk and derivatives management, and other complex financial instruments. But these services may not be what you need to run your emerging growth company. Their rates are about twice the rate of a local or regional bank.
7. Insurance
When was the last time you had a competitive quote from an alternative insurance broker? Insurance companies will only allow one “broker of record” at a time. That means when you want to have your current broker and another designated broker quote, you will have to choose which broker gets quotes from which insurance company. Insurance brokers naturally form strong relationships with insurance companies, if for no other reason than volume brings additional discounts.
Put your insurance needs out for bid to two brokers and insurance companies, and consider higher retentions and lower coverage limits if higher limits are not absolutely necessary.
8. Audit Fees
The big Four audit firms are similar to the large national clearing banks. These audit firms have armies of technical accounting staff to deal with complexity that arises domestically and internationally, and they have commensurate high-level fees.
The fee levels can be put into four groups: the top four, the next 3 national firms, regional firms, and small local CPAS. Make sure a CPA firm appropriately sized for your business performs your audit. The hourly rates are dramatically different between larger and smaller firms.
9. Social Marketing
Your website, social networking, and LinkedIn usage can save you enormous sums for marketing your company. Look at your marketing and sales costs and see if you can come up with lower cost alternatives. Advertising budgets, trade show involvements, and general events are prime areas for trimming or eliminating costs, as are enhanced inbound marketing approaches.
10. Selling to the Right Customers
When you analyze your customer base, you will find you have highly profitable customers, somewhat profitable customers, and outright loss makers. The loss makers are obviously the ones you want to turn into profitable customers--or else ditch them. Smart firms will not only rid themselves of loss-making customers but incent salespeople to bring only profit-producing customers on board. Whether you are reducing the selling cost or diverting resources to attain more profitable sales, you are moving to increase the cash and the profitability of the firm.
Taking advantage of just a few of these cost reductions will give you truly substantial cash and profit savings.
