Ten ideas to reduce expenses
Reducing your operating expense by just 5% can grow your bottom line by 20% or more. Trust me on this or check with your accountant. If your accountant can’t explain this to you, get a new accountant. Here are my 11 ideas to reduce your operating expense that have worked for hundreds of my clients. They won’t all apply to your business, many of them will.
First, make a list of your 20 biggest expense items. Clearly, they have the most potential for significant savings. Ask suppliers what opportunities or special terms you’re missing out on for whatever reason. Ask them for their thoughts on how you can operate more efficiently.
Your suppliers know stuff – and the good ones like it when you ask for help. The Papa John’s pizza chain, with stores in both Canada and the U.S., partnered with their supplier to create a new conveyor oven that cooks a pizza two minutes faster and reduces energy costs by 25%. This also allowed them to offer a time guarantee that increased their lunch business considerably. How might you truly ‘partner’ with your suppliers rather than just reaming them out for lower prices?
Outside industry experts can also spot major opportunities to improve your efficiency quickly and affordably. An outside set of eyes can make a big difference. Who are the ‘industry experts’ in your field?
Renegotiate every contract from maintenance and grounds keeping to insurance, phone and office equipment. Ask those suppliers how you can save money so you can stay with them and grow together. Be nice, be firm, be fair and switch suppliers if necessary.
One of our clients, whose average annual sales average about $6.5 million saved $30,000 a year by switching credit and debit card processing firms.
Check with your industry or trade association to see what special rates they’ve negotiated on things like insurance, car rental, hotel rates and employee benefits. If your association has done nothing to negotiate savings for its members, suggest they should do so.
Where or when are you overstaffed or keeping non-performers who are costing money, time and, perhaps, customers? What does it cost not to deal with non-performance? How can you adjust staffing without hurting levels of service?
Are you wasting space? One of my coaching clients reduced office space while growing their staff from 28 people to 45. How did they do it? They took the gutsy step of ditching ‘assigned seating’. Because their staff are in the office for only a small part of their normal work week, desks and computers are available on a first come, first served basis. The result? They saved $60,000 a year in rent and another $40,000 on IT costs. Do you have excess space or facilities that could be sold or rented out?
Embrace the power of ‘lean’ thinking. Many smart manufacturers and service providers are adopting ‘lean’ principles to create an efficiency advantage. ‘Lean principles’ are a disciplined approach to looking at the value added by each step in a productive process and how to do it better. You’ll find ‘lean’ practitioners in your area by searching the internet.
Here’s an example of the extraordinary efficiencies lean can achieved. For the past 58 years, Rowe Furniture – a producer of quality upholstered furniture for retailers in both Canada and the U.S. – often took six weeks to complete a customer order. While its still the generally accepted production cycle it drives retailers and consumers nuts.
So, to improve efficiency and create a compelling competitive advantage, Rowe’s management decided to cut the six weeks down to 10 days. They committed to the concept of The Ten-Day Sofa. They re-organised their production lines around ‘lean’ principles, re-trained their employees and made it happen. Production employees now manufacture more product, earn more money, get more time off and absenteeism is nearly half what it used to be.
If you manufacture or distribute anything or run a complex service business, looking into ‘lean’ could be one of the smartest things you do this year.
Another important way to reduce expenses is make sure your customers pay on time. Not managing cash flow is one of the biggest reasons for failure in small and medium size businesses. If you sell to consumers who pay by credit card, it’s not a problem. But if you extend credit, don’t let your accounts receivable get out of hand. It can kill you.
Often, small customers don’t pay because they can’t, and big customers don’t pay because they’re bastards. They want your lowest price and then keep you waiting months for payment. Don’t be so desperate for business you have to deal with unprofitable customers.
Sometimes it’s our own fault. We fail to invoice promptly or follow up diligently. Receivables don’t get better with age and writing off bad debts can destroy the bottom line.
I once had a client doing $1.8 million in sales with accounts receivable of over $600,000, mainly because his pathologically shy ex son-in-law was in charge of finances and was too shy to call clients and ask for payment. I do not make this stuff up.
Where might you be wasting materials or supplies? Pennies add up. I’m always amazed when take-out restaurants give me a week’s supply of napkins with a $15 food order.
One independent pizza restaurant owner I know invested just $40 on plastic bins and Ziploc bags to control cheese waste on the ‘make line’ and immediately improved her bottom line by 24%.
St. Mary’s River Smokehouses, in beautiful Nova Scotia, have turned small strips of salmon belly, formerly discarded, into a tasty and popular snack product. They’re smoked and then ‘peppered’ or glazed with maple syrup, attractively packaged, well priced and selling well.
Get creative. Cathay Pacific Airlines reduced the weight of each of the 747 aircraft used to haul freight by 200 kg by removing the exterior paint. They saved $200,000 in fuel, per plane, per year. That’s huge! Then, they renamed their now shiny, paintless air freight fleet The Silver Bullets. Brilliant marketing!
By changing the packaging of their Kirkland brand cashew nuts from round jars to square jars, Costco now fits 50% more jars on each pallet. It’s called ‘cube utilization’ and uses space more efficiently. This saves the shipping expense on 600 truckloads per year.
Embrace all the ways technology can help operate every part of your business more efficiently. Every business needs a sharp ‘technology advisor’. This is very different from a break and fix repair person. Who is your expert ‘technology advisor’?
One of my medium-sized clients now saves $30,000 a year by hosting their data off-site in ‘the Cloud’.
Note: Your staff will have lots of ideas on how to operate more efficiently and they’ve been waiting for you to ask, so ask them. Add this subject to your regular staff meetings or, three times a year create a specific two-hour ‘Idea Fest’ where everyone must come up with at least one idea to operate more effectively. Give them at least a week’s notice so they can do their homework. Then, let them vote on whose idea was best and give the winner $100, or dinner coupons from a wonderful high-end restaurant. The dinner coupons allow them to be heroes to their spouse or special friend – and that’s a bonus.
So, what will you do, starting now, to think and act more frugally and to reduce expenses by 5% or more? Repeat this exercise once a year. Keeping expenses down is an ongoing battle, not a one-time event.