According to the Global Entrepreneurship Monitor (GEM), there were about 400 million entrepreneurs all over the world as of 2011. The upsurge in entrepreneurship has brought about several advantages to the economy, but as the competition grows stiffer, business owners begin to struggle with finding the most cost-effective measures to stay in the industry. A sustainable business always aims for a higher profit margin and a lower operational cost.
Any expense related to running the business, including labor and utility, falls under the operational cost. Profit margin, meanwhile, refers to the percentage of profit obtained from every sale. Suffice it to say, the operational costs of a business directly impact the profit margin. Higher operational costs consequently lower the profit margin and a lower profit margin reflects a poor financial management, which not only damages the sustainability of the business but also its investor credibility.
Fortunately, there are many ways to effectively reduce the operational costs of a business without compromising the quality of product or service. Below are some tips:
First, there is a need to improve workers’ productivity. It is ironic how business owners immediately resort to retrenchment or diminution of worker benefits as soon as the issue of reducing costs arises. While this strategy technically lowers your operational expenses, this does not guarantee sustainability due to the consequent low employee morale and productivity. Reduction of headcount may lead to an increase in workload as the same number of tasks are now distributed among a fewer number of people. In severe cases, this setup can lead to employee burnout, low productivity, and high absenteeism.
Employers need to understand that to run a business in the most cost-effective manner, they need to invest in their people. The rule is to invest in quality rather than quantity. Conduct a manpower analysis. Determine the product time cycle and base your sales forecasts on accurate reports. This way, the number of heads required for optimum performance is determined. It’s alright to reduce the manpower, if need be, just ensure that the quality of performance and end products are still excellent. And do not forget to reward your people. This is the perfect time to strengthen the company’s performance appraisal system.
Another option is to outsource. If labor costs truly take a large cut of your operational expenses, you may consider outsourcing some of your business processes. But remember to always monitor what you delegate, especially during the initial phase.
Second, conduct a quick inventory count of all your assets. Unused machines and tools may be leased out to other businesses or individuals. Not only will you save office space and maintenance costs, but also earn additional income. Those items that are inoperable may even be sold out.
Another tip is to consult with your technician. There may be old items which are functional but not cost efficient anymore. Take for example the office air-conditioning unit. Old models consume more electricity than the new models equipped with energy efficiency measures. Replacing old models of electronic devices definitely lowers down your utility costs. Other measures include installing of CFL bulbs, finding alternative supplies of cleaning products, and simply turning the lights off during lunch breaks. Here, it again becomes important to empower your people and get them involved in your cost-saving initiatives.
When purchasing new equipment, such as copiers and printers, consider the payment options offered by the supplier apart from the efficiency of the equipment. Flexible payment options with reasonable interest rates allow you to spread your costs evenly, thereby avoiding a big dent in your monthly cash flow.
Third, purchase enough materials for your operations. This cost-saving measure is again related to managing your inventory and sales forecasts. The number one enemy of any business, including packaging supplies, is wastage, especially for those involved in perishable raw materials like restaurants. Make sure you order just enough to cover your daily sales, plus minimum contingency. Remember, a restaurant that purchases 5 baskets of apples and only consumes three in a week, or four at most, is only unnecessarily increasing its operational costs and is most certainly wasting one to two baskets of apples every week.
Fourth, embrace technology. Thankfully, technology automates business processes, thereby eliminating in-between tasks and reducing the operational costs. For example, instead of the usual paid company travels just to conduct meetings with your satellite offices, you can now hold conferences, meetings, seminars, and even interviews online.
Lastly, set a budget and stick to it. Sometimes, a company spends unnecessarily on activities that are unforeseen or are loosely defined. As a tip, set a contingency fund to cover emergency expenses and try your best to identify the possible emergency situations at the start of the fiscal year. Most importantly, set an allocation, minimum and maximum, to ensure your operational expenses won’t skyrocket.
For instance, advertising and other marketing initiatives can immensely and quickly damage your cash flow if you fail to allocate a definite budget for it as advertising firms can sometimes be persuasive to offer you great campaigns, promising great returns. Sure they deliver, but these firms never come cheap. With a definite budget, you know up to what extent you will be spending, won’t get easily persuaded, and learn how negotiate.
Running a business, small or big, is never easy. It does feel like a walk in the park — in Jurassic Park though. To stay in the game, one has to manage its finances well and needless to say, reducing the operational costs without compromising quality of work is a great lifesaver. The above-mentioned tips will surely be of great help.