TABLE OF CONTENTS
- What Is Cost Optimization?
- The Importance of Cost Control and Cost Reduction
- 12 Innovative Cost-Saving Ideas to Minimize Expenses
- Minimize Your Costs to Maximize Your Profits
Cost-saving initiatives can help offset rising expenses or falling profits.
Here are 12 tips for trimming your company’s expenses:
- Review your expenses
- Set measurable cost-cutting goals
- Prioritize your biggest savings opportunities
- Adopt automation to increase efficiency
- Use outsourcing to cut payroll costs
- Negotiate discounts with suppliers and contractors
- Join buying groups
- Take advantage of invoice early-payment discounts
- Make your marketing and sales investments count
- Minimize space usage
- Implement energy efficiency to trim utility costs
- Track tax-deductible expenses
Read on to learn what cost optimization is, why it’s important and how to implement an effective cost reduction strategy.
What Is Cost Optimization?
Cost optimization is a type of business optimization strategy that seeks to minimize expenses to maximize profits. Simply put, you limit spending to what is needed to achieve business objectives in a cost-efficient manner. You can achieve this by systematically reviewing spending, prioritizing expenses and reducing costs where feasible.
In the process, you ensure that all spending is achieving its intended purpose in the most efficient manner. You pursue these goals through tactics such as automation, outsourcing and comparative shopping.
Cost Avoidance vs. Cost Saving
A distinction is sometimes drawn between cost avoidance and cost saving. In this context, cost saving refers to the reduction of current expense payments. Cost avoidance refers to the minimization of future expenses.
For example, using this terminology, reducing current staff size might be a cost-saving strategy, whereas replacing current workers with automation in the future might be a cost-avoidance strategy. Here we will cover both types of strategies together without making a rigid terminology distinction.
The Importance of Cost Control and Cost Reduction
Cost minimization is one of the most important business financial planning strategies because it allows you to increase your profit margin without increasing your sales. (Indeed, increasing your sales may take a significant amount of investment and labor to improve your marketing performance.)
In contrast, cost reduction focuses on lowering your expenses rather than increasing them. This makes it a feasible financial strategy even if your current sales performance isn’t strong.
Even if your sales are strong, cost-cutting initiatives can increase your bottom line. Combining efficient cost-cutting strategies with effective marketing and sales strategies provides a path to maximize your profits.
12 Innovative Cost-Saving Ideas to Minimize Expenses
Any type of business expense can be a candidate for cost-cutting, so there are many ways you can pursue expense optimization.
Here are 12 of the best business expense management ideas applicable to most industries and companies. These cost-cutting ideas will work for large companies as well as smaller businesses.
1. Review Your Expenses
A strategic approach to cost-cutting starts with a review of your expenses as recorded in your financial statements.
Your key financial statements include your:
- Income statement (profit-and-loss statement), which records your revenue and expenses for a given period
- Cash-flow statement, which compares how much cash you have coming in during a given period with how much you need to cover expenses
- Balance sheet, which compares your assets and liabilities
Of these, your income statement and cash-flow statement will be most relevant for reviewing your expenses. Your income statement provides a tally of your total expenses as well as an itemized breakdown of what makes up your costs. Your cash-flow statement lets you see how far your income is going towards covering your expense obligations.
Use your financial statements to help you identify how much you need to trim your expenses and which costs need cutting. For effective cost management, get in the habit of reviewing your financial statements on a regular basis, such as once a month or once a week.
2. Set Measurable Cost-Cutting Goals
Reviewing your expenses provides you with your current numbers, putting you in a position to set goals for your future numbers.
Seek to identify specific areas where you can reduce costs, such as:
- Increasing your year-over-year savings: the amount you reduce your spending from one fiscal year to the next
- Reducing spending on specific line items, such as payroll, material procurement or marketing
- Lowering spending in specific departments
- Negotiating discounts with suppliers
- Consolidating your number of suppliers so that you deal with those who offer the best discounts
- Reducing “maverick spending” by employees who make purchases without going through authorized channels
- Cutting unnecessary expenses, such as duplication of tasks by 2 different departments, maintenance of outdated technology or mailing material which could be sent digitally
Set target numbers in these types of areas to guide your cost-cutting efforts.
3. Prioritize Your Biggest Savings Opportunities
As you review your expenses, you will notice that some items consume a larger portion of your budget than others. Placing a priority on reducing your biggest costs first will make your cost-cutting efforts more effective.
Typical large expenses include:
Your top expenses will vary based on your industry, business model and other variables. Focus on the expenses which have the biggest impact on your budget.
4. Adopt Automation to Increase Efficiency
Automation represents one major strategy for cutting costs. By allowing you to perform tasks more efficiently, automation can reduce your cost per unit of productivity, lowering your operational expenses. Automation also can save you money by allowing you to replace human labor, in some cases.
Any routine task which involves repetitive actions is a potential candidate for automation. Types of tasks that can be automated include:
- Syncing data from your sales software to your bookkeeping app to reduce data entry labor
- Updating inventory count after a sale is made
- Sending invoices
- Scanning in receipts for expense reports
- Project management scheduling and updates
- Logging into blogs and social media profiles to update marketing content
- Managing routine customer service inquiries
Before adopting a new technology solution, do a cost-benefit analysis to confirm that the benefits of automation will outweigh the cost of investment. If you determine that an automation solution is in order but you’re tight on cash, consider whether you should seek financing resources such as a business credit card to cover the cost of your investment.
5. Use Outsourcing to Cut Payroll Costs
Another major cost-trimming strategy is outsourcing. Outsourcing can help you reduce the costs of payroll, often one of the biggest expenses on business budgets.
A number of different categories of tasks lend themselves to outsourcing:
- Tasks that are essential for infrastructure but don’t involve your team’s core competence, such as bookkeeping
- Tasks that you lack the in-house skill to handle effectively, such as tech support
- Tasks that you could handle in-house but which could be handled more efficiently by outside specialists, such as fielding routine customer service calls
Review your payroll costs and operational structure and seek to identify places where outsourcing might help you cut expenses.
6. Negotiate Discounts With Suppliers and Contractors
Persuading your suppliers and contractors to extend you discounts can be another way to cut costs. Many providers advertise discounts for volume business, while others may be willing to extend consideration if you take the initiative to ask.
Suppliers and contractors may be more willing to extend discounts if you indicate an interest in purchasing from them regularly or on a large scale. You \also may be able to gain leverage in negotiating discounts by doing comparative shopping before committing to a provider.
7. Join Buying Groups
Businesses often band together to form buying groups, sometimes known as group purchasing organizations, which collectively negotiate discounts with suppliers. Joining a buying group can allow you to enjoy these prearranged discounts.
Joining a buying group typically requires paying a membership fee. Buying groups may have qualifications to join, such as a minimum annual revenue, time in business or purchase volume. You can find industry-specific buying groups by searching online, talking to business peers, asking your local chamber of commerce or attending trade shows.
8. Take Advantage of Invoice Early-Payment Discounts
Suppliers and contractors sometimes offer discounts for early payments. For instance, if your invoice requires you to pay within 30 days, it may include an incentive for paying within 10 days. Even if your terms of service don’t include such an arrangement, you may be able to negotiate one.
Check to see whether your provider offers an early-payment discount or is willing to arrange one. If you are able to obtain an early-payment arrangement, make sure you plan your cash-flow projections so that you can cover it.
If you need financing to cover the cost of early invoice payments, one option is to get an advance based on your own unpaid invoices to customers, known as invoice factoring or accounts receivable financing.
9. Make Your Marketing and Sales Investments Count
Marketing and sales are a necessary expense for generating revenue, but can consume a significant chunk of your budget. Make sure that your marketing investment is yielding a sustainable return.
Take steps to optimize your marketing strategy, such as:
- Using key performance indicators to track the success of your marketing campaigns
- Focusing your investment on your most successful marketing strategies
- Using content marketing to attract traffic from search engines and social media
- Improving your website copy to increase your conversion rates
- Following up with website visitors through email marketing and text marketing
- Cultivating repeat business with existing customers
- Reaching out to reactivate past customers
If you need help improving your sales performance, consider seeking assistance from a professional marketing agency.
10. Minimize Space Usage
Rent can be another significant business expense. You may be able to minimize rental costs by shifting office tasks to remote workspaces or outside contractors. Review your usage of space to determine whether this is an area where you could trim your budget.
11. Implement Energy Efficiency to Trim Utility Costs
Utility expenses can be another drain on your budget. Consider trimming your expenses by adopting energy-efficiency measures, such as:
- Installing a smart thermostat
- Performing regular maintenance on air filters and heating and air conditioning equipment
- Switching to smart lighting
- Installing energy-efficient bulbs
- Using power management features on computers
The U.S. government’s Energy Star website provides an action workbook to guide small businesses through implementing energy-efficient measures. Your local utility company can help you arrange an energy audit to identify your biggest energy drains and recommend cost-saving steps. The Small Business Administration also provides a guide to state and local energy-efficiency programs you can tap into.
12. Track Tax-Deductible Expenses
Certain business expenses can be deducted from your taxes. Make sure that you track your expenses carefully so that you can claim deductions you are eligible for. Automated business expense report tracking software such as Zoho Expense can assist you with this process.
The IRS provides a guide to deducting business expenses. Consult your tax professional for detailed guidance.
Minimize Your Costs to Maximize Your Profits
Pursuing cost-saving initiatives represents one of the most efficient, least expensive ways to increase your profit margin. In some cases, taking the steps necessary to cut your costs may require an up-front investment in automation, energy-efficient equipment or other measures.
If you need financing to implement your cost-cutting strategy but don’t have much cash on hand, consider a form of business financing which is funded by your current or future sales, such as accounts receivable financing or a merchant cash advance.