How to reduce costs and increase profits

Running a lean business operation by keeping costs as low as possible can help drive business success. It’s important to manage costs effectively when starting a business and look for ways to increase profits so you can grow.

Running a business isn’t just about making money; it’s about spending it too. You can’t avoid paying for production, technology, marketing and staff, but it’s vital that you keep those costs under control.

The goal of every business should be to make a profit. That means that you need to generate more money coming into your company than going out in expenses. Monitoring your costs and making smart purchasing decisions will help you grow a successful business.

Business costs explained

The costs incurred by your business are defined as direct and indirect.

Direct costs

These are costs that are directly associated with how you make and sell your product or services, known as the cost of goods sold.

Examples include the costs of raw materials, equipment, manufacturing supplies, software, wages for people required for directly making a product and the transporting of goods. In most cases, direct costs are variable because they depend on your business’s output or sales revenue and are directly related to how many products your business sells.

Indirect costs

These are costs that are not directly related to developing your product or service but are day-to-day business expenses.

Examples include utilities, office supplies, marketing activity, accounting services, insurance fees, rent and telephone bills. Indirect costs are generally fixed because they are the costs your business needs to pay no matter how many products it sells or customers it has.

Knowing all your business costs will help you better understand your product or service and create more profitable pricing. Closely monitor your expenses in relation to your income, so you know if you need to make savings and increase your profit margin.

How to manage business costs

There are many techniques start-ups can use to minimise costs and save money.

1. Outsourcing

Using a service from an external provider for certain business activities can reduce your costs as it’s generally much cheaper than paying a full-time member of staff.

A wide range of processes can be outsourced, including accounting, human resources, marketing and administration.

There can be some drawbacks to outsourcing. You have less control over an outsourced provider than you do with your own staff, and if things go wrong, it can cause problems. In addition, many providers are based overseas, which can lead to communication issues if they are in a different time zone or lack sufficient English language skills.

2. Suppliers

Renegotiating with suppliers is another way to cut costs. If several suppliers provide low volumes, reducing suppliers could allow you to negotiate bigger discounts for larger volumes from a smaller number of suppliers. Market changes or new innovations might mean your original contract is no longer good value, so it’s worth periodically reviewing any deals you have in place with suppliers.

When negotiating with suppliers, be confident about what you want. The supplier is under no obligation to accept your changes, but it’s likely they will want to keep you as a long-term customer and may be open to suggestions.

3. Just-in-time inventory

The just-in-time (JIT) inventory system involves a business receiving raw materials from a supplier only at the point they are needed. This process cuts expenses because the business has to pay only for the exact resources required to produce a product; there’s no need to keep inventory and warehouse storage costs are reduced.

To benefit from JIT, you need a strong relationship with your suppliers. There are also some downsides. A delay in receiving an order from a supplier could mean production has to be stopped, and you might miss out on discounts for bulk orders and more regular deliveries.

4. Utility bills

Switching to a cheaper utility supplier will reduce your costs. Keep track of all your bills, so you know exactly how much you are spending and compare it to the costs of other suppliers. You can do that manually yourself or by using a price comparison website. Before switching, make sure you know exactly what you are signing up for. The deal might seem better, but you could get locked into a long contract.

If you can’t switch to a different supplier due to the terms of your contract, you may still be able to move to a cheaper tariff, so give them a call and ask.

Pay your utility bills by direct debit, as this usually saves you money.

Check bills for accuracy as they are likely to be an estimate of your consumption. Read your meter and add the data into your online account, so you don’t end up paying for energy you haven’t used.

5. Energy usage

How you use energy in your business can have a significant impact on your costs.

Turn off equipment such as computers, printers, coffee machines and heating systems when they are not in use and encourage staff to do the same. It is estimated that leaving technology on standby costs around £1 a year for every watt of power used. That’s a small number on its own, but it can soon mount up with the number of appliances used by businesses.

Other ways to reduce energy in your business premises include:

• Completely filling dishwashers before they are switched on.
• Only using kettles to boil the exact amount of water needed.
• Regularly defrosting freezers, so they work efficiently.
• Switching to energy-saving lightbulbs.
• Sealing windows and doors to prevent heat loss.
• Installing automatic lighting, so areas aren’t illuminated unnecessarily.

 

6. Automation

You can make your business more efficient by automating time-consuming tasks with software. It will reduce your operational costs, cut down on human error, improve communication and enhance customer satisfaction.

A wide variety of tasks can be automated, including:

• Logistics and supply chain management
• Employee onboarding
• Generating and sending invoices to customers
• Employee holiday requests and expense claims
• Accounting and bookkeeping
• Project management
• Customer support
• Social media management.

 

7. Travel

Businesses can access a plethora of virtual meeting software, many of them free, which means you’ll save money on travelling.

If you do need to travel, book trips in advance to get the best prices and travel during off-peak hours. Use public transport such as buses and trains instead of taxis and consider contacting a hotel to negotiate a special rate if you are going to make regular bookings.

If you have employees who travel for business, have a clear company policy that outlines how much they can spend on accommodation and transport and what they can claim on expenses. Rather than letting employees make their own bookings, consider using a travel booking service or set up a corporate account for trains, buses and planes so you can track costs.

Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.