How to cut costs without impacting quality
While South Africa’s economy appears to be on the mend, the recovery will likely be a slow one. There are indeed many positive indicators, such as higher household spending, but the power crisis continues to be a massive concern, both for national economic growth and for the immediate profitability of businesses. In this context, many businesses will need to tighten their belts – but cannot afford to let this impact the quality they provide and lose valuable customers in the process. This can be achieved through a diverse range of strategies.
Inefficient use of space – including dispersed storage piles and spreads of equipment – is common for many businesses, and can waste huge sums of money. A straightforward option is to find smaller premises, but for many, the logistics of moving are prohibitive. A great alternative is to compact your own usage – which can be as simple as using a room for more than one purpose – and lease out unused space to another business.
Many businesses spend far more on supplies than they should, so be sure to shop around for the best deals. If you find the same thing for cheaper from a different supplier, you can ask your current one to match the price, or switch. Additionally, enquire about discounts – if you can buy in bulk, or pay promptly, many suppliers will offer a better price.
If an employee is reliably working the number of hours they are paid for, it may seem that they are maximising their output – but this is not always the case. If you have highly skilled employees who must do menial work such as data capturing or collecting accounts, they will be less productive where it counts. On the other hand, you may have employees who have various responsibilities – some of which they prefer to others. In this case, they may not be spending enough time on the disfavoured work – even if it is more valuable. How you manage this will depend on the context – offering incentives for exceeding goals in said work is one option.
Small businesses spend an average of 5% of revenue on advertising, while service-oriented businesses and start-ups often spend substantially more. While cutting out marketing is clearly not an option, there are cost-effective options. These include older forms of marketing like networking and asking for referrals, as well as newer ones, including websites and social media. In both cases, the cost is minimal, and the return is high, as they create more personal connections to your business.
Spreading your resources too widely leads to diminishing focus – which in turn reduces productivity and quality control. Rather than offering as many products or services as you can, focus on those you do best and that are most profitable. This can also enhance each of the tips mentioned so far – for example, less equipment taking up space, and greater employee focus on profitable work. Subcontracting or outsourcing work can be used to achieve the same effect: rather than cutting down on the products or services you offer, you can decrease time, space and money invested on peripheral activities, such as IT and managing accounts receivable.
Good costs vs bad costs
Not all costs are created equal. While this article has covered some of the more common strategies of cost-cutting across businesses, each industry, and even individual business, will have different expenditure ratios. When deciding which costs can be cut, you should evaluate whether they align with the growth of your business. Cutting costs in some areas can facilitate investment in others.
A cost-effective financing plan
While all forms of financing come at a cost, the right one can ensure savings in other areas. How, for example, does one buy supplies in bulk while having to wait up to 120 days for payment from your client? The traditional answer would be to take out a loan, but the cost of paying it off can become counterproductive – leaving aside the difficulty SMEs face in securing one in the first place.
Factoring offers a cost-effective alternative. With factoring, your business sells its accounts receivable to a third-party organisation – a factor – who gives you cash up front. This allows you to negotiate better deals on supplies, through bulk-purchases or quick payment. In addition, partnering with Merchant Factors enables a host of other cost-cutting strategies, as creditor control and debtor administration services are provided for no extra charge. This means you avoid the costs and space associated with managing accounts in-house – instead investing it in high-quality work that creates value and grows your business.
For fast, flexible business finance – contact Merchant Factors today
Finance beyond the Numbers.