When it comes to saving money and reducing costs, there are some simple, and straightforward approaches that all successful businesses use. Reducing business costs has perhaps never been more important than in the current economic climate businesses find themselves in.
In the worst recession since the Great Depression, more and more businesses are starting to take the time to review their operations, and take appropriate steps to control costs. Your company must be proactive and reduce costs as often as possible. So, what are the top five ways for businesses to save money?
1. Understand Total Costs of Inventory
Think of inventory as the daily cost of money. It costs money to support inventory, and every day that inventory is not sold, it costs more. Not enough inventory, and you’ll likely miss important sales. Too much inventory and it costs your company too much. Finding a happy medium between too much, and too little, inventory is not easy. However, make sure to run an inventory system that is suited to the market your company services and the clients your company sells to. Don’t run an inventory system because you read how well it works for Dell, Honda or any other big company. Run an inventory system that makes sense for your business.
In my experience, I’ve seen many companies try to run JIT (Just in Time) because it was something they read worked elsewhere. In other cases, I’ve seen companies run a Min/Max inventory system, when they had the volume and abilities to make JIT work. Running the wrong inventory system will cost your business money.
Choose the Right Supply Chain Strategy: Make it an Easy Choice
2. How Can a Company Get Better Interest Rates?
The credit rating that grades your business is called Dunn & Bradstreet. There are others, such as Equifax, but Dunn & Bradstreet is the most common. This credit rating produces a report called a D&B Report. This report is used by the banks, lending institutions and suppliers that give your business loans and extend your company terms. Every time your business pays a bill, it is graded on the D&B Report.
Pay your bills quickly, and your rating is better. Pay your bills late, and your rating is lower. A higher rating means your business is less risky to those that lend you money. The most important aspect is to make sure your business pays its highest amount owing first, as the D&B Report is a weighted average. Now, I am not insinuating that paying your bills early is easy, however, I have seen first hand how companies try and hold back on payments in order to get a better interest rate by leaving the money in the bank. If your business can pay its bills quickly, then do so.
Your business will get a better rating and you can use this to negotiate better credit terms and interest rates on the money you borrow. Secondly, get to know all your creditors and make sure they know when they’ll be paid. This will help them from reporting your business as being late – which will affect your rating.
3. How Much In Sales Does Your Business Needs to Make $1.00 of Profit?
When it comes to saving money, your businesses greatest asset are your people. One of the best ways to understand the importance of saving money, is to know what amount of sales your business must generate to produce $1.00 of profit. For some companies, it’s $8.00, for others it can be even higher. The point is, every $1.00 of savings is equal to $8.00 of sales, and knowing how hard it is to generate sales, saving $1.00 at a time, is equal to an 800% return on investment.
Now, you can save through your purchasing department by maximizing your economies of scale and volumes, and you can also save by treating your internal departments as cost centers – to be managed with cost savings in mind. When it comes to saving money, empower your employees to become active participants. Give them the power to help your business.
4. Do You Know How Much it Costs to Get a New Customer?
Regardless of how good your product is, if the cost to get a new customer and keep them is more than the profit generated on the sale, then your business losses. It’s that simple. I’ve worked with a number of businesses with great products, but no idea of how much it cost to get a customer.
Your business must learn to reduce the cost of getting and securing that new customer. This is all tied into your marketing and sales initiatives. In order to understand how to improve your cost of customers, here’s a link on exactly what goes into figuring out that cost.
The table above is taken from the post: Does Your Business Know How Much it Costs to Get a New Customer?
5. Your Business Must Protect Your Profit at all Costs!
Protecting your profit margins and saving money are one and the same. The best businesses don’t allow a slow down in business, or reduced profit margins, to go too long without making a correction. Now, this sometimes involves the unpopular decision of laying off employees.
The best businesses protect their profit by ensuring that they maintain a healthy profit margin on the products and services they sell. So, don’t just start reducing salaries whenever you see a dip, but use the following to save money, and keep your service capabilities at a high level.
- Consider outsourcing your marketing: Outsourced marketing firms offer a huge cost advantage over full time positions, and they will bring new customers to your door.
- Consider outsourcing your accounting and certain labor: Companies use temporary employees all the time. There is nothing at all wrong with it, and it saves money. Take the time to look into outsourcing some of your more transferable job functions.
- Consider renting office space, selling outdated equipment, and up-charging on services: In difficult times, I’ve seen many companies take extra warehouse and office space, rent it out, and even take outdated equipment, and sell it on the used equipment market.
Get used to controlling costs for your business. Once your employees become accustomed to saving money, and if you empower and reward them for their efforts and ideas, it will come back in important savings. This blog is full of different ways to save money and you only need to search in it to find different ways to improve your bottom line.
When it comes to saving money for small business owners, these are five critical areas to review. However, don't stop at these five. Take the time to define your company's business model and identify other areas where costs savings must be available.
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