Increasing revenue isn’t the only way to strengthen your business’s financial performance. Another option is to take a closer look at operating expenses and determine whether every dollar you spend delivers value. A systematic review of major expense categories can uncover opportunities to reduce waste and protect your bottom line without sacrificing long-term growth. Here are some tips to help you use financial data to cut selectively.
Review compensation and benefit costs
Evaluate your total employment costs. These include salaries, wages and employee benefits, such as health insurance and retirement plan contributions. Benefits account for more than 30% of total employee compensation, according to the U.S. Bureau of Labor Statistics.
As you seek to offer competitive pay and benefits, compare your total compensation for each position with what others in your industry pay for similar roles. Consider adjustments if your compensation differs significantly from these benchmarks. Sometimes you can offset salary reductions by adding cost-effective benefits and perks that your workers might value — such as flexible work arrangements and professional development opportunities — to help maintain morale and minimize turnover.
Evaluate vendor and subscription spending
Gather all your vendor contracts so your management team can review them together. These may include contracts with suppliers, insurers, professional services providers, cleaners, landscapers, technology firms and software subscription providers. Determine if you’re paying for overlapping services from multiple providers. If so, eliminate unnecessary vendors. Next, evaluate the services you’re purchasing from each provider and whether they’re necessary. For instance, you might be paying a vendor to perform a service that your staff could accomplish with technology you already have in place.
Finally, designate a preferred provider in each expense category and negotiate the best price with this vendor. Require employees to use preferred vendors unless there are extenuating circumstances that are approved by a manager. Also consider leases for equipment and property that could be renegotiated on more favorable terms. Before changing vendors or renegotiating contracts, it’s important to review cancellation penalties and renewal deadlines.
Measure marketing ROI
Work closely with your marketing team or agency to measure the effectiveness of your current campaigns. Some businesses spend thousands of dollars a month on advertising, digital marketing and other promotional efforts that deliver few, if any, results. Ask your marketing team to estimate the return on investment (ROI) of campaigns across channels, including search, social media, email and traditional advertising. Based on this analysis, reduce or eliminate spending on ineffective campaigns and consider diverting these funds to campaigns with stronger ROIs.
Also, consider putting your advertising account out to bid if you haven’t done so in the past year or two. Many agencies automatically increase their rates annually. Tell your current agency that you’re shopping around and ask them for their best price. If you decide to switch to a new agency, you might benefit from fresh ideas and new perspectives on increasing revenue.
Keep borrowing costs under control
If your business borrows money for equipment, real property or working capital needs, interest expense is probably a significant item on your income statement. Although commercial interest rates have eased from their recent highs, borrowing costs remain elevated for many businesses. If you have variable-rate loans, financing costs may still be adversely affecting your profitability.
Your business operations should generate returns that exceed the cost of your debt. If not, high interest costs could lead to financial distress. To avoid this pitfall, brainstorm ways to lower borrowing costs and improve cash flow.
For instance, you might be able to lower your interest rate by shopping around for fixed-rate loans or refinancing existing debt if more favorable terms are available. Shorter terms may reduce total interest costs but increase monthly payments. Alternatively, you may need to draw less from your line of credit by managing inventory and receivables more efficiently. Also consider setting aside some operating cash to pay down your outstanding loans, rather than taking dividends or paying bonuses.
Take a targeted approach
Reducing expenses doesn’t mean cutting costs across the board. The goal is to eliminate spending that isn’t contributing to your success while continuing to invest in the people, technology and resources your business needs to grow. Contact us for guidance on performing a comprehensive expense review. We can help you analyze margins and identify strategies to improve profitability without undermining your long-term business goals.
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