How to reduce costs (plus common mistakes to avoid)

By Indeed Editorial Team

Published 7 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Reducing business costs is a good way to maximise profit and grow a business. To reduce these costs, businesses can focus their efforts on identifying discretionary spending and determining ways to minimise these expenses. It's much easier to succeed in your cost-reduction efforts when you know what mistakes to avoid and have example steps to follow. In this article, we discuss what business costs are, list some common cost-reduction mistakes to avoid and demonstrate ways to reduce costs.

What are business costs?

Business costs are expenses incurred during the operations of a business, so it's important if you work in a business you know how to reduce costs. Cutting costs means that you can reallocate resources to more cost-saving projects with high success rates. The four main business costs include:

  • Variable costs: These costs change in proportion to the amount of output the business sells or produces. Some variable costs include the purchase of raw materials for production, energy costs incurred from production processes, employee wages and salespeople commissions.

  • Fixed costs: By contrast to variable costs, fixed costs don't change in relation to the business output. Fixed expenses include rent and business rates, insurance payments, employee salaries and advertising or campaign costs.

  • Indirect costs: Indirect costs are expenses incurred irrespective of whether the production of goods or services takes place. They include expenses overhead expenses, such as utilities and rent and various administrative expenses.

  • Direct costs: These costs are those directly associated with the production of goods or services. They include labour costs, raw materials, manufacturing supplies and power consumption costs.

Related: Total variable cost formula (and how to calculate it)

How to reduce costs

It's much easier to cut business costs when you have a clear plan or structure to follow. Use this example guide on how to reduce costs for best practice:

1. Reduce supply expenses

Contact your vendors to let them know your price shopping and looking to reduce your office supply expenses. Price shopping involves working diligently to learn about how much things cost and draw price comparisons. If your supplier is unwilling to negotiate, consider buying your supplies from large discount suppliers. These vendors usually beat traditional prices and have exclusive offers all year round.

Related: What are expenses and what are the different types?

2. Cut production costs

Optimise your resources by searching for ways to cut material costs. Track and measure the operational efficiency of the business and make adjustments where necessary. Set performance parameters that align with your long-term goals and business strategies so you can track your changes. Some ways to cut production costs include:

  • Centralising your workspace necessary for the production

  • Leasing unused space to other businesses

  • Selling leftover materials to B2B companies

  • Avoid overscheduling staff

  • Substituting expensive materials for more affordable options

3. Lower financial expenditures

It's nearly impossible to cut costs without looking at your financial accounts and insurance policies. Compare insurance providers and determine the most competitive rate. Ask your current insurance provider or lender to match that rate or consider entering a new agreement. If your insurance is too high, find out whether you're duplicating coverage or over-insured.

4. Modernise your marketing techniques

There are several marketing techniques available and some are cheaper than others. First, eliminate any marketing efforts that don't seem to return on investment. Email marketing campaigns and social media posts are two of the most inexpensive ways to market a business. Another cheap alternative is to attend networking events, such as conferences and charity events. This allows you to show clients the faces behind the brand and make a more lasting impression. If you rely on a marketing agency to boost your brand awareness, consider doing more in-house.

Related: 12 inexpensive marketing ideas for small businesses

5. Implement time strategies

Remember, more time spent on projects equates to more expenditure. Work to minimise distractions and promote a more productive workplace. Set reasonable task deadlines and communicate them to team members. Always predetermine meeting times and offer incentives to employees who exceed your time expectations.

6. Narrow your focus

Some companies struggle to maximise their profits because they try to do too much with their resources. Narrow your focus by limiting the number of products or services you offer. This requires you to perform an audit of what goods or services are performing the best and likely to increase your return on investment. This allows you to focus more on quality rather than quantity.

7. Harness virtual technology

Today, virtual technologies are making it easy for businesses to cut down on travel and overhead expenses. Conduct virtual meetings to avoid spending money on renting a physical space and limit physical contact to instances when it's most important. Use a virtual drive tool to better coordinate your resources and share them with colleagues virtually.

8. Maximise employee skills

Restructure the business to showcase and capitalise on the experience and skill set of employees. Create work teams and facilitate cross-functional communications for better workplace productivity. Remember to include employees in your cost-benefit analysis and brainstorming sessions for professional feedback. Employees work on the ground and have a better understanding of the work processes than most.

Related: 13 ways to maximise time efficiency in the workplace

Cost-reduction mistakes to avoid

Understanding the common mistakes businesses make when aiming to reduce expenses helps you ensure that you don't follow in their footsteps and avoid common pitfalls. Avoiding these mistakes also guarantees that you create a strategic cost optimisation approach that increases business growth and mitigates risk. Here are some common cost-reduction mistakes to avoid:

Jumping into growth investment opportunities

Some businesses invest in new growth opportunities without considering their tied-in processes and the complex nature of them. This leads to businesses becoming bogged down in unnecessary processes and with little time to discuss the implications of their investment. This is especially the case where growth investments are fast-paced and have multiple stages. Be sure to allocate enough time to discuss your capital budgeting and expenses at the beginning of a growth investment opportunity. Converse with senior management to make them aware of your pre-investment plans and garner their approval. This demonstrates your commitment to effective risk management.

Related: Your guide to controlling cost in project management

Making blanket cuts with unrealistic targets

When companies face dire financial circumstances, they oftentimes consider making substantial cuts across all areas of the company rather than specific departments to slice an arbitrary percentage of the budget. Since all departments suffer from blanket cuts, it becomes difficult for individual teams to manage cost reduction and coordinate their efforts. This is because all of them are required to find new ways of managing and delivering.

Blanket cuts are an unrealistic measure that does more harm than good for businesses. Instead, conduct investigations into the cost areas of various departments and consider how expense rates differ between them. Use your findings to make informed decisions about departmental cuts. This ensures you make more specific, measurable, attainable, realistic and timed (SMART) decisions about the future of the business.

Related: How to develop SMART goals

Rushing into contracts

Spend time reading the terms and conditions of contracts before agreeing with vendors, providers or other business partners. Doing so ensures you avoid unfavourable terms or overpriced fees that maximise rather than minimise your expenses. Consider ways to get more out of your contract with other parties and negotiate these terms with them. Long-term partners that have a trusting relationship are usually more open to negotiations than new partners. Draw attention to certain terminology or phrases that you don't understand. Also, remember to discuss the requirements for exiting a contract.

Avoiding much-needed innovation

Some companies aim to reduce business costs by making employees redundant and creating more capacity to take on new initiatives. This has a negative impact on employee confidence and can cause staff to become apprehensive when participating in or taking on these new growth initiatives. Instead, think of innovation in terms of your existing team rather than one-off investments. Restructure your network and bring in teams from across the business to brainstorm new ideas and contribute feedback.

Businesses hire employees for their talent, so capitalise on their expertise when you need them most. Existing employees also have expert knowledge and experience in the business and usually know how to help it more than third-party companies.

Failing to sustain behaviour change

Often, companies fail to put cost-saving initiatives in place that go beyond a short-term focus. This is because these initiatives aren't seen as anything more than a response to the current situation. To become more cost-aware, businesses can look at implementing more long-term plans. This means fostering a more cost-conscious work culture and making business costs an important part of decision-making processes.

Disregarding digitalisation

We often attribute failure to grow as a company to underspending on digitalisation and technology. Most businesses today understand this, yet struggle to find an adequate starting point got their digital business transformation. They have money allocated to digitalisation efforts, but an improper plan is in place on how to spend it. To digitalise a business, focus on a particular function in the company that you want to improve or sustain.

Think about areas in the businesses that could benefit from more collaborative, adaptive and agile processes. Most businesses use digitalisation to improve workflow and make processes more time-efficient. Whatever the case, ensure that your digital transformation contributes to customer or client outcomes and coincides well with existing frameworks and technologies. Also, make sure that all employees feel competent using new digital formats and address any concerns where they arise.

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