Cut These Overheads to Improve the Profitability of Your Business
written by: N Nayab•edited by: Jean Scheid•updated: 8/25/2011
Success in business depends on the returns generated vis-a-vis the capital. Profit maximization through price differentials has limited scope in today’s open business environment. Entrepreneurs rather need to pursue business cost reduction ideas to increase profits without increasing prices.
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1. Reduce Office Space
Working from home, and allowing employees to telecommute ranks top among the ways to cut costs. The expenses related to offices, such as rentals, fees for facilities, energy and utility bills, and other costs add up as a major cost for doing business. Such costs are non-remunerative, that is the money spent does not make more money. Small businesses would do well to adopt a work from home model, and medium to large businesses would do well to have a small central office, with the bulk of employees telecommuting.
Full-time telework saves normal companies about $20,000 per employee annually. The employee gains by reduced commuting time, flexible hours and other benefits.
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2. Eliminate Business Travel
Business travel costs such as accommodations, flight, and transportation costs constitute the bulk of business overheads, and cutting down on such costs offer substantial savings. Do not travel for business unless absolutely avoidable, and always seek alternatives. When faced with no alternatives, try to combine two or more trips into one, and fly the same airline to earn frequent flyer benefits.
The proliferation of technology makes teleconferencing and videoconferencing a viable alternative to traveling long distances to attend business meetings and conferences. Recent developments such as 3G and bandwidth speed has brought down the costs related to videoconferencing and improved the quality of live streaming.
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3. Go Digital
One major area of business expenditures is office expenses related to maintaining records. Going digital, or keeping electronic records saves valuable real estate space, does away with the cost of procuring and maintaining lockers and shelves, and the purchase cost of stationery, especially paper.
The drive to go digital, however, should be in moderation. Going overboard with digital documentation might lead to vulnerabilities such as non-compliance with legal formalities, failure to enforce key contracts, loss of valuable data owing to inadequate network security measures or backup policies, and other issues. Business cost reducing strategies aimed at a paperless office need to ensure proper backups and adequate controls and safeguards related to data management.
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4. Hire Part Timers and Temp Help
Keeping the issues of ethics aside, employing part-time, temporary, and contract workers helps businesses cut costs substantially. Temporary workers receive less pay and benefits than permanent workers do. Payment is output-based, allowing the business to cut costs on supervision as well.
The flip side of over reliance on temporary workers is the organization losing sustainable intellectual capital, leading to potential loss of competitive advantages in the long run. The best practice is, therefore, to engage temporary workers for clerical and other works that do not add a high value, or do not form a part of the organization’s core activities.
Options to reduce employee costs for permanent workers include opting for performance linked incentives and piecework contracts, and offering cafeteria plan benefits to save on social security contributions and payroll taxes.
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The benefit of technology extends to automating processes. Automation helps reduce staff and associated costs, and ensures the best possible output, without errors. More and more companies now use self-service booths for both external and internal processes, to cut costs, and allow customers a greater degree of customization and error-free output.
The best example of successful application of automation is ATM machines replacing bank tellers. Not only do such machines allow banks to reduce their headcount, it streamline operations, minimize the chances of errors, allowing tracking easy, and to top it all off, provides customers with superior service in less time than before.
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Leasing instead of purchasing often ranks high as a business cost reduction idea. Leasing means that the business needs to pay only the rent and doesn't have to invest a large sum upfront, or worry about depreciation or maintenance.The machinery provider also provides ready service.
The benefits of purchasing machinery over leasing, such as ability to claim tax benefits citing deprecation, and lesser overall net outgo in the long-term depends on the scale of operations. For small and medium scale businesses, very often the limited savings resultant from small business volumes do not justify the upfront investment for purchasing new machinery.
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7. Opt for Low Cost Advertising
One major area of business expenditures is advertising. Businesses would do well to take advantage of low-cost advertising options to cut costs. Some ways include:
Taking advantage of free classifieds
Opting for low-cost but high visibility ad options such as flyers, notice board postings, welcome kits, and other measures
Placing magnetic stickers on company cars
Offering compliments such as door hangers, key chains, and bags
No low-cost marketing strategy is complete without leveraging the power of Internet. Internet-based targeted ads, SEO marketing, participating in forums and writing blogs to increase visibility ranks as another good way to promote the company at a much lesser cost than conventional advertising methods.
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8. Leverage Free Resources
A major area of business expenditures are expenses on business tools such as software and fees for consultants to develop systems and forms.Much of these costs are avoidable, for the Internet provides much of these resources free.
Look no further than the Bright Hub Media Gallery for a vast array of forms and templates related to Human Resources. Similarly, draw into thousands of free and open source applications for basic processes such as accounts, inventory management, and other requirements. The entrepreneur only needs patience to search for the most relevant freeware tool and some skills to customize the available resource to suit the company.
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9. Adopt Zero Working Capital Model
Most businesses require working capital to run operations. Zero working capital is an innovative approach where businesses operate without blocking cash in working capital. This approach works in tandem with the Just in Time (JIT) methodology where purchase of the required inputs takes place on an as needed basis, and payments are usually made after receiving payment from the customers. Businesses would do well to adopt such methods and save considerable costs.
Other related business cost reduction ideas include renegotiating contracts for better deals to take advantage of changed economic conditions, opting for debt consolidation, and similar financial management initiatives.
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10. Apply TQM, Six Sigma and Other Initiatives
Total Quality Management (TQM), Six Sigma, Kaizen, 5S, Lean, and other quality management initiatives all aim at improving the product or bringing about process efficiency. Such interventions, although requiring some upfront investment, saves costs in the immediate to short-term by improving process efficiency, raising productivity, and other measures. Lean for instance eliminates non-essential processes, and Six Sigma eliminates waste. The resultant increase in quality also leads to better customer satisfaction and increased sales.
In the fiercely competitive business environment with cutthroat margins, only those businesses that adopt effective business cost reduction choices will become a lean and mean organization, and survive.