Running a business takes stamina, gumption, meticulous planning, and (of course) money. You have many fixed and variable costs, such as rent and utilities, inventory purchases, professional fees, and employee wages. Are your business expenses leaving you high and dry?
Whether you have a negative cash flow or want to take precautions, here are some steps you should take to decrease your current small business expenses.
How to cut business expenses
If you want to increase business profits, you likely can’t depend solely on increasing revenue. Focus your efforts into reducing costs to improve cash flow and encourage small business success.
Here are six relatively easy ways to cut expenses in your small business today.
1. Analyze your current expenses
Before you can make changes to your spending strategy, you need to know where to cut back on costs. Analyze your current expenses and look for areas you can either decrease spending or eliminate.
Reference your records, such as accounting books or receipts, to examine your expenses. Small business income statements also list out your expenses. Create and analyze your income statement to see where and how you are spending money.
Two main expense areas you may want to examine are your overhead costs and cost of goods sold (COGS). Overhead costs are expenses that support your business but don’t directly generate revenue, such as rent. Analyze your COGS (e.g., raw materials) to determine how much you spend to produce goods or provide services.
Compare your current and past data to see whether your expenses are increasing or decreasing between accounting periods. Pay attention to seasonal trends and brainstorm ways you can cut back on costs.
2. Get rid of costs you don’t need
After you have an idea of where your business spends money, you can cut back costs or eliminate unnecessary expenses. Some areas you might reduce costs in are utilities, labor, advertising, and professional fees.
Better manage your utilities to eliminate unnecessary costs. Check out ways to prevent wasting electric, gas, and water consumption. For example, you may notice that your electric bill skyrockets in the summer because of air conditioning. Consider relying less on the air conditioning. If you usually set the AC to 67 degrees, you could try setting it to 72 degrees to save money on your utility bill.
For many businesses, having employees is a top expense. You can cut labor costs by reducing employee hours. Or, you might give employees more responsibilities instead of hiring additional workers.
Instead of spending thousands of dollars on small business advertising campaigns, take advantage of social media marketing. Social media is generally free, with paid options that might be less expensive than other advertising methods. Use social media to engage with customers and potential customers, promote your small business, and place targeted ads.
Lastly, examine your professional fees and determine whether you can use less expensive alternatives. If you exclusively use bookkeepers and accountants, consider using software to manage simple payroll and accounting tasks.
3. Shop around for new vendors
Another way you can cut back expenses is to compare what your current vendors charge you to other vendors. A new vendor might be eager for your business, making them more willing to offer you a deal.
When shopping around for new vendors, consider buying wholesale. Wholesalers can offer you items in bulk at lower prices than individual products. But before buying wholesale, verify that you will use large quantities. Otherwise, you could end up wasting products and your money.
4. Practice life cycle costing before purchasing
Getting used equipment might be a way to save money upfront, but will it cost you down the line?
When it comes to cost-cutting, one of the top pieces of advice centers around purchasing used, inexpensive equipment. Although buying used equipment is a great way to save money upfront, you should also take its other costs into account.
To avoid purchasing an asset that’s inexpensive upfront and costly over time, practice life cycle costing.
Life cycle costing estimates how much you will spend on an asset over time. Life cycle costing looks beyond an item’s purchase price and considers other expenses like installation, maintenance, and disposal fees.
If you’re trying to cut back on costs, it might be easy to look at two price tags and choose the lowest option. Instead, compare your options and forecast how much they will cost overall.
5. Consolidate or refinance your loans
Did you fund your business by taking out loans? If so, you know how expensive monthly loan payments can be. Consider debt consolidation or refinancing to reduce business expenses.
If you have multiple loan payments per month, consider consolidation. Business debt consolidation combines multiple, smaller loans into one large loan. By consolidating your loans, you can lower your monthly payments. You can make one monthly loan payment instead of making multiple payments.
Refinancing loans is the process of taking out a new loan to replace a current loan. Loan refinancing can get you lower interest rates and better payment terms.
6. Better manage your inventory
Failing to track your inventory accurately can lead to poor purchasing decisions and money down the drain. Not to mention, damaged or stolen inventory (shrinkage) can be costly for your small business.
To avoid inventory shrinkage and overstocked shelves, you must effectively manage your inventory. Record inventory in your accounting books when you make purchases and sales.
If you lose high amounts of inventory to shrinkage, consider implementing a new production process and being proactive against employee and customer theft.
Do you order too much inventory? If your shelves are always overstocked, consider purchasing inventory in lower quantities. You can monitor which items take longer to sell to help guide your purchasing decisions.
