Over time, cutting costs for startups and SMEs has been an area of challenge to many entrepreneurs and business owners. Lots of studies have shown that this singular factor has led to the untimely demise of many startups and SMEs, thus the usual question by many entrepreneurs, how do I cut down on costs for my business?
Although the amount of literature on this topic in the public domain is extensive, this remains a major challenge many startups and SMEs grapple with, hence, the need to address this question concisely in today’s blog post.
In my experience, the art of cutting costs or cost management for startups and SMEs is not a one-day thing, it is a culture that is slowly built over time until it becomes part of the DNA of your business. But it begins by implementing a few tips which I am going to highlight below.
5 Tips to Cutting Costs for Your Startup/Business
1. Plan Effectively
Some business owners lack the habit/culture of planning, and this is having a negative toll on their business. As an entrepreneur or business owner, the number one key to addressing the issue of cost management in your business is planning. Planning as an exercise helps you to prioritize the necessary items needed to run your business effectively while minimizing any additional costs.
How do I plan effectively you may ask, for one, you can start by drafting out a business plan. This exercise of building a business plan is a very important but very dreaded activity for many business owners, some consider it difficult and time-consuming. The good news is that there are alternatives. If you have problems developing your business plan, you can outsource to professionals like Effe Towers who can help develop a professional document that will give you a bird’s eye view of your business. Also, if this isn’t an option for you, you can create a concise one-page overview of your business using a Business Model Canvas (BMC) or a Lean canvas. The most important thing is that you have a plan/blueprint for managing operations in your business to cut costs.
2. Track Income & Expenses
Besides effective planning, another good tip to cutting costs for your startup or SME is through effective and keen tracking of income and expenses, especially your expenses. As a business owner, tracking your income and expenses should be a culture you start building from day one of your business, and you follow religiously if you indeed want to cut down on costs.
Taking note of your startup capital, incurred expenses from inventories, bills, salaries, vendors, etc. will assist you in highlighting areas where you spend unnecessarily, and you can now take the necessary actions to cut down on them.
3. Manage Fixed & Variable Costs
Let’s begin with the definitions of these terms. Fixed costs are costs that do not change when sales or production volumes increase or decrease. This is because they are not directly associated with manufacturing a product or delivering a service. Examples include rent, taxes, salaries, etc. While variable costs rise when sales and production go up and fall when sales and production volumes go down. Examples are raw materials, labor, inventory, etc.
In managing variable costs, look at your company’s past variable expenses and calculate what percentage of sales they represent. Take note of those with good historic indicators, and cut down on those with poor performances.
While for fixed costs, this is an aspect many entrepreneurs find difficult to manage because they are usually long-term and might involve a lasting relationship with a vendor. To address this, make sure you get a quote for that product or service from at least three other vendors to cross-check to ensure that you are not spending unnecessarily.
4. Explore Technological Tools
Technology has made the cost of doing business so low like never before. No matter the industry you operate in, as a startup or small business owner, there are some free online tools you can access to carry out your business operations until you are big enough to employ people to do those things, or pay for the premium tools. Finding these tools are easy, simply go online and search for a free X tool to do XYZ, and boom the search engine gives you what you are looking for. So, don’t spend that extra cash and time doing something that has been automated, and can be done for you at no cost.
5. Cut the Extras
The classic entrepreneurial dream is a fancy working space, a large vibrant team, team events, sponsored vacations, etc. Yeah, all of these are important, but trust me, these can be detrimental to your business in its early days. Learning to manage resources and cutting down on unnecessary costs is a must-have skill for every entrepreneur/business owner. This will attract investors to you if you are out looking for investment. Investors like to put their money where they know that operations can be managed effectively to yield high returns.
So, trim the extras, hire only the key roles you need, lease or rent a workspace only when necessary, if not try working virtually, there are now several online tools like Slack, Trello, Asana, Zoom, etc which you can use to manage your team effectively and still maintain a high-quality business and organization. It’s just a matter of cutting down on the extras and employing only the essentials.
Those are my five simple tips for cutting costs for your startup or business. Of cause, there are more technical tips out there, but imbibing these five tips stated above into the DNA of your business today will go a long way to cutting costs for your business and maximizing profits.
