"It's more important than ever for small businesses to be savvy and cut costs wherever they can." Stefan Töpfer, CEO Winweb.com
When is a good time to start cutting costs? Is it best to ignore costs when your business is riding high? Or should you wait until the signals are clear that demand has fallen before you begin the necessary cost-cutting analysis? This post explores four cost-cutting strategies that are being deployed by companies all around the world, small businesses, and your competitors.
As a small business owner you can follow their lead to boost your profits as well. There is no one-size-fits-all approach. But one of the key themes in this research is to not wait until the ship is sinking before plugging your profit leaks.
1. Cost-cutting Strategy: Expense Category
This is the most common method small business owners use to cut their excess costs. It's simple, the information is generally readily available, and the cost-cutting options are easily found. Common areas for expense category cuts are: space, telecom, vehicles, utilities, and printing; they might be different in your business. The analysis begins with your current expenses and a view toward a more suitable level for those expenses. Take a look at your tax return or a recent profit and loss statement. Expenses cut across products, services, customers, and locations. There are lots of quick wins available with this powerful cost-cutting strategy.
In which business expense categories have your costs grown beyond expectations? Perhaps a look at your year-over-year or seasonal trends might signal that an expense category analysis could be worthwhile in your business now.
2. Cost-cutting Strategy: Product
The second strategy focuses your cost-cutting attention on a specific product or division. In this approach, all related expenses are on the table for consideration. The European company BASF recently underwent a major analysis to reduce fixed costs at its specialty chemicals business even as sales and profits increased in other areas. A small business owner could explore: purchasing, materials, design, production, and delivery, among other areas tied to a product.
Any and every cost related to this product is under review. In this strategy, there's a strong possibility that inter-related expenses can be found. For example, a change in materials could lead to a change in design options and production methods. Be advised that these changes can move in both directions; one way increases quality while another could measurably reduce quality.
Are all of your products delivering their fair share to your bottom line? If it has been a while since you have done a product profitability analysis, now is a good time to see if more of your attention is warranted.
3. Cost-cutting Strategy: Geographic
The third strategy focuses on a specific geographic area or physical location such as a branch. Generally, an income statement for the city (multiple stores) where the business is operating or a specific store location can be easily compiled. In this case all the numbers are used to evaluate whether the location is pulling its weight in terms of contributing to the required minimum profit margin and overheads. Electrolux decided to close its factory for refrigerators and freezers in Australia to concentrate its production in Thailand.
Regional bank Hancock Holding Company is closing or selling 36 branches in Louisiana and Texas affecting around 300 staff and costing $21m in the process. Yet it's often not an overall industry phenomenon; in fast food Quiznos is closing stores while Subway is opening them. KFC is shrinking while Chick-fil-A is expanding. And it's not just who you see across the street; retailers including Best Buy and Barnes & Noble are facing stiff on-line competition.
If you have multiple locations it's time to run a geographic income statement to consolidate all the profits and expenses associated with that location. This analysis needs to be a bit more strategic because physical distribution expenses to some profitable locations will be greatly affected if some nearby locations are closed. So take a holistic look at this cost-cutting strategy before taking any action. But it is definitely worth a look.
As much as we small business owners don't like to admit it, some customers are simply not worth it. If you've encountered some bad customer behavior in your past you know exactly what I mean. These are the customers that make excessive demands, whose expectations simply cannot be met while you deliver your offerings at a reasonable profit. I'm not referring to a one-off incident. Time and time again these customers squeeze out extra services, extra benefits, rework, special treatment, late nights, expedited delivery and a whole host of other cost building activities without a commensurate increase in price.
When we are starting our businesses we welcome all customers with great anticipation that the exchange will indeed be profitable. That's the deal. You deliver quality and they pay a fair price. I know of a woman who was banned from the Home Shopping Network because she returned almost everything; there is a pattern here over several years. The lifetime value of the customer was simply not high enough to retain her as a customer.
You don't need to take drastic action, but knowing what has happened in the past and your options going forward is very powerful. If you're not sure whether you're making money on each and every customer, perform a customer profitability analysis on a few of them. You'll know where to start. Look at the revenues and go beyond the numbers to include the associated services, time, and money required to service them and see if you are really generating your target profit margins on each customer in question. Look at your fixed costs to check on contribution. And you'll find it's time to treat your high-profit customers just a little better too.
No matter how profitable your small business is there are ways for you to cut excess costs and to boost profits to your bottom line. Excess costs exist in 99% of small businesses. Select one of these four areas to begin your own cost-cutting exercise in your business right away and let me know what you discover.