How to cut costs in a small business
Advice from Dr Shailendra Vyakarnam of Cranfield School of Management
Minimising your spending should be a key priority if your business cash flow is to remain healthy. You must continually control your costs, only spend when there is a sound business reason and buy from suppliers who offer best value, as Dr Shailendra Vyakarnam, Director of the Bettany Centre for Entrepreneurship at Cranfield School of Management, explains How common is it for a small business to build up cost inefficiencies?
Shailendra Vyakarnam (SV): “Quite common, it often happens because owners and managers focus more or less solely on sales, not enough time or consideration is given to cost control. And as the business has grown, new employees aren’t given sufficient cost-control guidance or training. To keep customers happy, small firms often work long hours and weekends. Being flexible can be expensive.”
What are the key dangers of failing to control costs?
SV: “Fail to control your costs and your business could fail. Lack of cost control can also come from spending more time ‘doing’ than thinking about how the business is run. Also, bad habits can creep into day-to-day operations. Some are not easily visible, but their effects are higher costs, less profit and unnecessary cash flow pressure.”
Can cutting cost by too much or in the wrong places be harmful?
SV: Yes, if not properly thought out it can damage productivity. Owners and managers must avoid cutting costs in places where investment is required, such as marketing, staffing or IT.”
Should managers involve staff in the cost-cutting process?
SV: “Consulting staff on key matters is generally advised. They might have really good ideas on how to save money, in places or ways you hadn’t considered. You should hold regular staff meetings where your people can give their opinions on operations, opportunities and ways to improve, including cost reduction. These meetings should be held regularly in a positive, inclusive atmosphere.”
How do small businesses commonly waste money?
SV: “Buying too much stock or the wrong inventory, advertising and marketing that doesn’t bring in enough sales, recruitment and staffing, premises, utilities, administration and management, stationery, travel, professional fees - money can be wasted in many areas. Poor decisions by owners can waste a lot of money, too.”
Does cost cutting involve having to make difficult decisions?
SV: “ Sometimes it does, and in most small businesses wages are the biggest cost, which must be considered carefully. If you realise your business is over-staffed, you may have to let some people go, which is tough for everyone, but sometimes it has to be done for the good of the business. Management and leadership involve making tough decisions.”
What about outsourcing, can this reduce business costs?
SV: “For many years, outsourcing has enabled larger businesses to reduce their costs, and more and more small firms are doing it now to save money on deliveries, IT, accounting, marketing, HR and many other things. It must be done with caution, to protect your business and its reputation, but it can provide much better value for money if you find the right supplier.”
How hard should I negotiate with suppliers to get the best value?
SV: “You have to be firm and determined, but both parties have to be satisfied with the deal. Explore your options with every fixed and variable cost, but focus on value. It’s not just about the cheapest price, it’s also about quality and service.”
What are your key cost-cutting tips for small firms?
SV: Regularly assess your spending and try to identify ways to save money. Involve your whole team in this. Ask other business owners how they save money. Ask your suppliers how you could provide you with better value. If you’re wasting money, address it straight away. You can’t afford to procrastinate or avoid difficult decisions.”