Working out ways to reduce costs in business has always been an excellent option if you’re looking to improve your overheads. However, in 2023 the financial climate is as tumultuous for companies as it has been in years — particularly those operating with a smaller reach. The pressure being put on the UK’s industries due to rising costs and bills is immense and is forcing many towards administration.
Often the best tactic to keep your company afloat, reducing business costs across the board can, if done correctly, keep the lights on without ever needing to affect either your operation or your relationship with consumers.
Find out more about the process of reducing business costs, what makes it so important, how you can go about doing it, and how it can benefit you and your business.
Why is it Important to Reduce Costs in Businesses Currently?
In 2023, businesses in the United Kingdom are being struck by the effects of the ongoing cost of living crisis and, as a result, many need to consider how they can reduce costs. This is because at the same time, bills are on the rise and consumer spending is on the decline.
Businesses are scrambling for ways of reducing business costs for a number of different reasons. The most common of which being:
- Bills Increasing: The typical UK household is expecting to pay, on average, upwards of £4,000 more for energy in 2023 than the years previous. With businesses expecting even more of an increase, the impact is often hitting hard.
- Rise in Costs: A knock-on effect of the rise in bills is that many companies are also charging more for raw materials.
- Decrease in Consumer Spending: During times of financial hardship, people are, understandably, less keen on spending money on ‘non-essential’ items. This is causing major issues to companies who are in desperate need of the business.
- Increase in Staff Turnover: An effect of the financial crisis that many may not have considered is that, if wages cannot keep in line with the rising cost of living, then people may leave jobs in search of ‘better’ opportunities. Increased staff turnover can result in reduced services — further impacting company margins.
With all of the above costs in mind, it’s easy to see why many companies are seeking out methods to reduce their operating costs.
How to Reduce Costs in Business
Reducing costs in business is something that, with commitment and proper organisation and planning, can be relatively simple. However, without these things it can seem impossible. Key steps to reduce costs in business include optimising your inventory management, streamline processes and reduce unnecessary costs, review staffing needs, and much more.
Ultimately, while reducing business costs during times of financial difficulty is vital. It’s equally important that you ensure you work to maintain quality. If you make sweeping cuts to your business due to tightening margins, but your core consumer base is affected and becomes unhappy, it could lead to them going elsewhere, even further impacting the money coming in.
Steps to reduce costs in business include, but are not limited to:
Conduct a Thorough Review of Company Finances
Likely the first step for anybody seeking to reduce company costs is to pause, review, and analyse the firm’s expenses. Financial aspects of the company that should be considered and assessed include:
- Rent
- Utilities
- Supply costs
- Maintenance
- Staff costs
- Travel expenses
The purpose of this review stage is to determine which areas are costing significant sums. It might then be clearer which factors could be restructured or reworked to cut costs without significantly affecting the businesses operation or the quality of its offering.
Negotiate With Suppliers
Often a big contributor to rising business costs is ‘overpriced’ supplier deals. The misnomer of this is that these deals will often not have been considered ‘overpriced’ originally, as they will often have been signed when business was booming and expected to continue to succeed.
However, once trade dwindles and customers are on the decline, these big deals can quickly become unaffordable.
You may wish to approach a supplier and attempt to discuss a new price, a discounted service, or more favourable payment terms that would allow you to pay for goods in a way that would suit your current situation better.
Another thing you may wish to consider, if you are certain you will be retaining the supplier for the foreseeable future but need a reduction now, is increasing your order in the long term. This can lead to a volume discount.
While suppliers, particularly those feeling the financial hardship themselves, may not be immediately keen on reducing rates, it’s often a worthwhile option. If you are in the position where you can’t afford to continue dealing with a supplier as-is, a lowered rate could suit both parties. This would mean that you can make more affordable payments while the supplier can continue to count on your trade.
Implement More Effective Inventory Management
If a company has spent significant sums on bulk buying stock, and is then hit with an unexpected financial hit, it could lead to some panic as the margins for error reduce and the risk of financial implosion increases.
Working out a more effective method of inventory management can reduce the risk of carrying unnecessary or excess inventory. Common methods of increasing the effectiveness of inventory management include:
- Work out ways to better forecast demand
- Establish effective order and reorder processes
- Regularly monitor stock turnover and consumer trends to determine if there is any unnecessary stock
Review Your Team
While it is often said that your workforce is like a family, sentimentality is worth very little when the doors are closing. It’s important that you get on top of your staffing needs.
There are a number of questions you should ask to this end, do you have an optimal number of staff for your needs? Would letting go of any staff cause issues to your service? Are you hiring unnecessarily? Would cross-training employees improve team flexibility?
What are the Benefits of Reducing Costs in a Business?
During a time of financial struggle, there would be a number of benefits of reducing costs in a business. These reasons include increasing profitability, it can allow you to gain an upper hand on the competition, provide you with increased flexibility, boost employee retention, and more.
Common benefits of reducing costs in a business that a director or company owner should consider include:
Improving Firm Profitability
The worry when expenses are forced to rise is that it will impact the company’s profit margins. Reducing business costs, even just in the short-term, can allow you to maintain or even improve your profitability and allow you to stave off the fear of closure or insolvency.
Gain an Advantage
If all your competitors are forced to increase their prices, it will have a knock on effect on their consumers, who may feel forced to look elsewhere.
If you are able to, cutting company costs and passing that saving onto the consumer by keeping prices as low as possible could give you a significant competitive advantage. It might even allow you to stave off the need for more unpleasant cuts, like in the workforce.
Improve Cash Flow
If you were to attempt to reduce costs, you could put yourself in a position to improve company cash flow and make your business more stable in the long-term.
Make Yourself More Agile
During a cost of living crisis, the pressure will be on a business to maintain the funds to keep itself afloat. By working to effectively reduce costs, companies can keep funds aside that allow them to be more agile and ready for anything during changing markets.
Retain Core Staff
As covered briefly above, your team is, in many cases, like a small family. Likely one of the last things you would wish to do is make a decision that puts their livelihood at risk or causes them to be unable to provide for their families or keep the lights on.
Cutting costs will allow you to better retain valued members of the team.
Is Your Business Struggling? Inquesta Can Help
A struggling company can cause significant stress to everybody from top to bottom. In many cases, cuts can not only be recommended, but necessary.
When financial pressures are tightening on companies, cuts are often required to keep the lights on. However, this is not always possible. It is estimated that over 50% of all small businesses are at risk of closing their doors during 2023 due to the financial pressures being put on them by the ongoing cost of living crisis.
If your company is struggling, it might be worth getting in touch with an expert. The Inquesta team of insolvency specialists is on hand to offer our help to struggling businesses.
We can advise on what your best steps are moving forwards to ensure a positive outcome, provide advice on minimising tax arrears and debts, and, if necessary, we can offer liquidation and insolvency advice to ensure that the company closes with as much dignity and as little knock-on effect to its directors as possible.
Our team has years of experience operating in the field of insolvency and has seen it all, making us perfectly placed to support you during a difficult period.
For additional information about what Inquesta Insolvency can do to help and support you, get in touch today or request a free no-obligation consultation.