Guide

12 cost saving ideas for under-pressure businesses

Sometimes a business has to cut costs. Here are 12 common ways to find savings.

Why you may need to cut business costs

Most businesses struggle with shrinking profits at some point, whether that’s due to inflation or a slowdown in sales. The obvious answer is to increase your prices – but customers may not be willing, or able, to pay more.

That leaves cost cutting – the never fun but often necessary step back to profitability. Start by pulling up a comprehensive list of your costs, either by checking your business bank statements, emails and receipts, or by opening accounting software like Xero. And let’s get trimming.

The problem with cutting business costs

Cutting costs is a fine balance that deserves careful thought. If you cut too heavily in the wrong places, the quality of your products or services could decline. Apart from hurting customer satisfaction and retention, that can make work unfulfilling.

And pulling back on costs like work tools, contractors, and office supplies could lead to inefficient working conditions, which can stress your team, damage morale and hurt your productivity.

Keep these risks in mind when deciding where to cut your costs. The aim is to make your business smarter, not worse.

12 business cost saving ideas

1. Reduce discretionary spending

Discretionary costs, like travel and entertainment, are the obvious first target. Could you hold that meeting online rather than in person? Do you need that magazine subscription? Have a think about what’s "nice to have" and what’s essential.

2. Review and renegotiate supply chains

Shop around for better prices on core supplies. Look for alternatives but also discuss prices with your incumbents – they may do you a deal. Bulk buying is often an option, but bear in mind it’s a long-term saving – the cost per unit will fall, but you’ll need to stump up more cash for those bigger orders.

3. Carry less inventory

Less inventory means you’ll have less cash tied up in stock, which improves liquidity and can reduce storage and shrinkage costs. Be aware that smaller orders may cut you off from bulk deals with your suppliers, so factor that into your decisions. Get inventory management tips to help refine your strategy.

4. Optimize logistics

Check courier and freight bills to find waste, and buy supplies from close to home if you can. Think about settling for slower transport options and if you deliver to customers, look at how you can share those costs with them. They may not pick up the delivery bill entirely, but perhaps you could charge for express while offering a slower, free service.

5. Develop economy products and services

If customers can’t or won’t pay more, maybe it’d be smart to offer lower-spec’d options that still meet their needs at less cost. But try to keep the high-value products or services for customers who want and can afford them.

6. Go remote

Do you actually need all that office space? Mobile office tools let people work productively from home, so give them a go. If it works out, you could downsize your footprint and your rent. Shop owners can do the same if they move to more online sales.

7. Share resources

Consider whether there’s a business you could "buddy up" with to share the costs of workshop space, equipment, or consultants. You could even share staff across your organizations, such as administrative staff, front of house, laborers, or sales people.

8. Conserve energy and minimize waste

Think about doing an energy audit. Energy is a major expense, especially for manufacturers, so an audit can show you if you’re wasting money in your choice of providers, tools, or factory design. Keep watch for other forms of waste, as they all amount to unnecessary expenses.

9. Automate administrative work

Using software to cut down your employees’ workloads can save you money in overtime payments and increase your team's productivity – a two-for-one cost saving. Make sure you’re up to date on the latest apps to support your employees’ work.

10. Refinance to lower-cost loans

Interest on business loans can be a massive expense, so make sure your debt is well structured. You could be better off rolling high interest short-term borrowing into a lower interest long-term loan.

Get a bookkeeper, accountant or trained broker to look at your finances. You can find one in Xero’s advisor directory.

11. Restructure costs

Sometimes it's not about the costs themselves but their timing. If lots of expenses come due at the same time, it might pay to reorganize business costs rather than reduce them.

You could:

  • adjust payment schedules with your suppliers
  • place orders at different times
  • use free (or low cost) credit to help spread out payments
  • discuss the timing of sales commissions and bonuses so they don’t all fall at once
  • lease equipment instead of buying it
  • choose different payment plans for things like insurance

There may already be more flexibility in your expense calendar than you think. Running a cash flow forecast can help you schedule your costs.

12. Outsource to reduce fixed costs

Outsourcing is a type of cost restructuring that helps change fixed costs into variable costs. Instead of keeping an expensive machine or hiring extra people for tasks that come up only occasionally, you give (outsource) those jobs to an external provider. Then (as a rule), your costs will go up only when sales go up – when sales are down, you don’t have to pay anything.

Where the best cost-saving ideas come from

Don’t forget that the people who know your business best are your employees. So check in with them and ask how to reduce business costs – they’ll see opportunities you never thought of. Mentors, accountants and bookkeepers will also have great ideas. If you don’t already have one, you can find an accountant or bookkeeper in our advisor directory.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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