You can never have low enough overhead. Many entrepreneurs are always trying to figure out how to reduce operating expenses in business.
Let’s take a look at why you should reduce operating expenses in your business and what doing so can ultimately mean for a business owner like you.
1. Why Do You Want to Reduce Overhead?
With economic times being as unpredictable as they are, there are a number of reasons why you might want to keep your overhead as low as you possibly can.
Do any of these scenarios sound familiar?
- Customer demand for your goods or services isn’t what it used to be – It could be that what you provide is seen as something of a luxury that people feel as though they can’t afford to use at the moment. Or perhaps there has been a perceived decline in your product’s quality.
Regardless of the reason, people aren’t buying in the amounts that they once did. This could lead you to trying to figure out how to reduce operating expenses in business, among other things.
- Revenue is down across the board – This could be tied to the decreased demand or could be influenced by other factors like you being unfamiliar with what your competitors are doing.
Either way, decreased revenue could have you scrambling to figure out how to keep your head above water long enough to work out a way to get a strong cash flow going again.
- Revenue isn’t being used efficiently – Do you often find your business is spending money in areas where it doesn’t need to be?
Wasteful spending is every bit as much a hindrance to growth in business finance as it is in personal finance, so it makes sense that you want to look at ways to keep that sort of a spending to an absolute minimum or simply eliminate it outright.
2. What You Need to Know Beforehand
What many business owners don’t realize in figuring out how to reduce operating expenses in business is that doing so can often carries risks. This makes the process of lowering your overhead more trouble than it’s worth and could potentially leave you worse off in the long run than you were when you first started.
Before you think about ways to reduce your company’s operating expenses, there are several worthwhile questions that you have to ask yourself.
Namely:
- How will my customers be affected? – Everything that you do should ultimately benefit your customers in some way. If the actions that you take in reducing your company’s operating costs could conceivably alienate the people to whom you provide your services, then your plans will definitely need to be reevaluated.
- Will the quality of my products suffer? – Offering product that is inferior to what you used to provide cancels out anything that you achieved through reducing your overhead. If they don’t notice right away, your customers will notice the decline in time and take their business elsewhere.
You want to make sure that your offerings remain the same so that you can keep your customers happy.
- Will it put me at a disadvantage? – You always want to be able to keep up with your competitors, so your strategy on how to reduce operating expenses in business should never undermine your competitive edge.
If lower overhead means fewer offerings, a reduced service area, fewer business hours or anything else that competitors could take advantage of, then you need to rework your business plan to lower your expenses without having to resort to any of those potentially harmful measures.
3. What You Can Do
Knowing what you do about how your business can be negatively affected by lowering your overhead, keep in mind that there are still several ways to go about continuing your business while remaining profitable.
The question of how to reduce operating expenses in business without being detrimental can be answered in some of the following ways:
- Look at your employees – It makes sense that most consumers hold good customer service above anything else when considering where they will spend their money. That’s why you want to look at your employees as a way of reducing business costs.
How is that done, exactly?
Train your employees and keep them happy!
By providing a high level of training, your employees will know how to deal with certain situations and will be able to meet the needs of your customers.
Show your employees how important they are to the company’s mission and you’ll keep turnover, which can lead to high costs for your business, low.
- Consider outsourcing some business functions – Every business relies on important services like information technology (IT) for communication purposes, and accounting for bookkeeping purposes.
In figuring out how to reduce operating expenses in business, one thing you could look at is outsourcing these important functions to professionals who specialize in these areas.
With respect to IT, outsourcing can save you money be lifting the burden of having to maintain, install, and update equipment and software, as well as having to devote time and resources to dealing with troubleshooting.
With respect to accounting, having a consultant carry out your company’s financial oversight will allow you to take advantage of expert bookkeeping that will be able to oversee financial record keeping much more efficiently than you might be able to were you to take care of it yourself.
Outsourcing both IT and accounting are textbook examples of how to reduce operating expenses in business because they allow you to get business critical services while avoiding payroll expenses and other taxes you would incur if you had these professionals as part of your regular staff.
- Look at your production costs – How much is it costing you to provide your services to your customers?
You want to look at the materials that go into what you provide, as well as your relationship with the suppliers who provide you with those raw materials.
Are there alternatives that you can use in your production without affecting the quality? Do you have a strong enough relationship with your suppliers that you would be able to renegotiate the terms of your contract?
Many times, figuring out how to reduce operating expenses in business can be as simple as forming and maintaining strong business to business relationships with other companies.
Other times, it’s a matter of finding alternative ways to do something that you’re already doing.
- Conserve energy – This may seem like a very basic premise, but take a look at how much good reducing your energy bill can do and you’ll see why it’s such a good idea.
By taking small steps like turning off devices when they aren’t in use, using lower wattage light bulbs, and generally conserving whenever the opportunity presents itself, you can see a dramatic reduction in one of your recurring bills.
These are just a few of the measures that you can take to keeping your company’s operating costs low. You just have to remember that when it comes to figuring out how to reduce operating expenses in business, you want to look for examples that might be unique to your industry on top of the examples illustrated here.
Keeping your overhead low without sacrificing quality of service or withdrawing the affections of long time customers will go a long way towards helping your bottom line.
Remember, running a business successfully does not need to be complicated. Keep it simple!
Check out our website at www.portalcfo.com for more tips on how to grow your business profitably.
You may also be interested in Learning How to Reduce Operational Risk.
Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.
