Cost reduction is the process used by businesses to reduce their costs and increase their profits. It’s fairly obvious that every small business should look to manage costs and keep them to a reasonable level. That’s all you need to know.
The important lesson here is what you need to do, cost reduction is all about action. It’s a discipline that small businesses need to maintain to monitor and manage costs on an ongoing basis to make sure they don’t grow out of hand.
To help small business owners, managers and operators with this process, I’ve put together a comprehensive (and growing) list of cost reduction ideas. You can quickly run through them, note down the ideas you think you can apply to your small business, and then rank them by benefit and get going.
The beauty of cost reduction is that all the ideas are self-explanatory. You don’t need a guide to execute each cost reduction, just get to it!
Cost Reduction Ideas by Category
In case you want to start somewhere specific, here are the categories:
- Top 7 Cost Reduction Ideas
- Procurement Cost Reduction Ideas
- Employee Cost Reduction Ideas
- Training and Productivity Cost Reduction Ideas
- Travel & Entertainment Cost Reduction Ideas
- Energy Cost Reduction Ideas
- Equipment and Vehicles Cost Reduction Ideas
- Finance Cost Reduction Ideas
- Insurance and Benefits Cost Reduction Ideas
- Real Estate Cost Reduction Ideas
- Miscellaneous Cost Reduction Ideas
Okay, let’s start!
Top 7 Cost Reduction Ideas for Small Business
If you only have a few minutes to spare, here's my 7 favorite cost reduction ideas you should consider executing right now:
- Identify profit centers by analyzing monthly financial statements; consider closing down unprofitable areas.
- Set up and monitor departmental budgets.
- For at least several months, sign all checks for expenses and eliminate unnecessary items.
- Set up an employee incentive program to generate cost-reduction ideas.
- Ask managers for written plans on eliminating unnecessary expenses in their departments and other departments.
- Discuss economic issues with staff to help motivate them to do a better job for your clients, customers and business.
- Set up a committee to create new cost-cutting measures and enforce existing measures.
Read on for more, if you’re leaving now, before you go you should sign up for more free simple business improvement ideas.
Procurement Cost Reduction Ideas for Small Business
- Negotiate special terms and prices with suppliers to accommodate your cash flow requirements.
- If you do not receive significant price reductions for bulk purchases, order inventory on an as-needed basis.
- Prepare comparative analysis of competitors’ pricing.
- Comparative-shop for supply prices.
- Get bids on all major expenditures.
Employee Cost Reduction Ideas for Small Business
- Eliminate employee theft by implementing adequate internal controls.
- Reduce your compensation to the level necessary to cover your living expenses. This shows your sincerity in tackling cash-flow problems.
- Decide if bonuses are justified. (Bonuses should be determined by profit or performance, and not time of year.)
- Limit expense authorization to the owner or upper management.
- Put a freeze on hiring and salary increases.
- Use independent contractors instead of employees when possible.
- Consider using part-time employees. This reduces the amount of benefit payments.
- Utilize an administrative or part-time employee instead of a messenger service.
- Eliminate all overtime hours unless prior approval has been obtained.
- Consider reducing employees’ hours rather than eliminating positions. For example, go to a six-hour day rather than an eight-hour day.
- Consider using an automated payroll service to reduce in-house costs.
Training and Productivity Cost Reduction Ideas for Small Business
- Prepare a procedures manual to scale down training costs and make job transitions less costly.
- Reduce unnecessary meetings; use an agenda to make meetings more efficient; table non-agenda items; set a time limit on meetings.
- Cross-train staff to perform multiple functions, and combine job duties where possible.
- Look closely at employees to determine their productivity. Non-productive employees should be terminated and replaced with productive personnel.
- Be alert to the increased number of job-seekers. Be selective and choose the best employees now.
- Send one person to a particular course (i.e. software training course) and make that person a resource to others on that subject.
Travel & Entertainment Cost Reduction Ideas for Small Business
- Encourage use of videoconferencing to cut down on travel.
- Cut down on entertainment expenses. For example, have meetings in the office rather than at a restaurant.
- Take advantage of local seminars to reduce travel expenses.
Energy Cost Reduction Ideas for Small Business
- Turn off lights when not in use.
- Set back air conditioning and heating at night.
Equipment and Vehicles Cost Reduction Ideas for Small Business
- When it’s necessary to purchase equipment, use trade industry surveys that rate the equipment’s performance.
- Consider leasing equipment rather than purchasing.
- Negotiate equipment lease terms to be paid during peak business cycles.
- Discourage personal use of company vehicles.
Finance Cost Reduction Ideas for Small Business
- Pay bills when due, not before.
- Consider using non-cash bonuses such as stock options, ESOPs, etc, as employee compensation.
- Make use of tax advantaged “cash or deferred” fringes (cafeteria plan) to reduce payroll costs.
- Tighten credit policies for all customers.
- Take advantage of purchase discounts, even if borrowing is necessary. For example, “2 percent/10” terms will save you 36 percent over 360 days.
- Check references before extending credit to a new customer.
- Be certain that customers understand your credit terms.
- Request customers to pay by invoice rather than by statement.
- Settle customer billing disputes promptly.
- Secure two lines of credit at different banks, before you need the funds. Be sure to shop for rate and pay back arrangements.
- Take advantage of interest bearing-checking accounts.
- Consolidate loans to obtain a lower interest rate.
- Shop banks for the best credit card processing fees and interest rates.
- Use extra cash to reduce debt and lower interest payments.
- Sell idle assets.
Insurance and Benefits Cost Reduction Ideas for Small Business
- Consult your life insurance agent for ways to reduce costs of life, disability and health insurance.
- Consult your casualty insurance agent to reduce costs of all other insurance.
Real Estate Cost Reduction Ideas for Small Business
- Sub-lease unused office space.
- Renegotiate your lease by asking for a downward rent adjustment.
- Consider leasing real estate rather than purchasing.
Miscellaneous Cost Reduction Ideas for Small Business
- Eliminate excess or duplicate publication subscriptions.
- Eliminate excess or duplicate software subscriptions.
- Eliminate excess or duplicate association dues.
- Examine your telecom bill for billing errors.
- Send a .pdf by email instead using a messenger or delivery service.
- Use two-sided copies instead of single-sided copies.
- Consider adjusting hours of operation to meet customer demand.
Maintaining cost discipline is a no brainer and continually performing a cost reduction process is the best way to achieve this.
I hope this post has provided you with some ideas to bring to your business.
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