Economic times are so hard that small business owners are looking for every opportunity to cut their costs.
These business advisers felt that costs had been cut so close to the bone that there was hardly any more room to cut costs further.
It’s not the subject that everyone likes talking about but cutting costs is essential if your small business is to survive these most unfortunate times.
Basically, you have two types of costs – fixed costs and variable costs. Fixed costs are also known as overheads and include business expenditure that is constant or fixed irrespective of the level of trading. For example, rent, rates, salaries and insurance are fixed costs.
Variable costs, also known as direct costs, include expenditure which varies depending on your level of sales. For example, raw materials would be a variable cost.
Your sales need to cover both your fixed and variable costs. The difference between sales and variable costs is your cost of sales but then you also need to subtract your fixed costs which will leave you with your surplus or profit.
You have to be careful when trying to reduce the cost of raw materials. The reason is because your raw materials maintain a certain quality or standard that your customers are used to. If you identify substitutes and then use them in your product, you may upset customers who could see your product as inferior. But make no mistake it’s important to keep a continual eye on your raw material costs and try to negotiate better prices with suppliers.
Some small business owners may be sitting in their businesses wondering where they can cut costs further. It’s going to be a painful experience but it can mean the difference between staying in business or closing your doors if you handle overhead costs well.
Over time small businesses can acquire unnecessary higher overheads. That’s why it’s good practice to review your overheads annually but in this volatile and hard economy, you should be reviewing them all the time.
Overheads to review includes staff, vehicles, business premises, heat and light, insurances, purchasing, travel, finance, advertising and promotion, phone and cell calls and any expenses listed under general administration or “sundries”.
Business survival may mean reducing employees, voluntary retrenchment, outsourcing non-core activities, doing without expensive promotion, cutting business perks to senior management, renting smaller premises, selling non-essential machinery and equipment and getting rid of any vehicles. It may be a good idea not to renew the owners’ or sales staffs’ cars.
While it’s important to run “bare bones” in poor economic conditions, when your small business has stabilised, it’s important to focus on growing sales.
That’s where new ideas, new approaches and new concepts are vital.
One business I came across the other day wasn’t retrenching its employees but it has actually grown from 1 to 18 employees in their first year. It’s in a specialised part of the agricultural sector. The owner was able to take all 18 employees and the partners for an exclusive weekend getaway to thank them for their hard work. This is a business started on a new idea.
It’s new ideas that propel growth. But if your business doesn’t have new ideas, lacks creativity and innovation, then you will reach a point where “bare bones” is not enough and then it’s game over.