How To Stay Profitable After Cost Reduction

2020.09.04 12:28 PM By Joshua Taddeo, Principal Consultant

Set Clear Goals for Profitability and Increasing Revenue

No matter the size and scale of your business, cash flow and profitability are among the most critical aspects that you need to be consistently monitoring. Simply put, it is all about how money is flowing into and out of your business. While it’s essential to keep costs low, reducing them without a well thought out strategy can hamper profitability rather than increase it because you might inadvertently let go of resources that played an integral part in driving revenue to your business.

You can avoid this pitfall by carefully considering your strategy or approach to cost reduction and maintaining profitability. This is all the more important with digital transformation, empowering the business world with new avenues to reduce costs and increase revenue.

Set Clear Goals for Profitability and Increasing Revenue

Having well-defined goals can massively transform your business. After all, you cannot reach anywhere if you don’t know where you are going. Working out what exactly you want to achieve in terms of numbers is critical in devising a plan or a roadmap that will help you get there.

A business profitability goal defines the amount of revenue you need to generate to cover your expenses and earn a profit. Your goal must be realistic and achievable. You must consider your business’s unique growth capability and set out a feasible plan that takes into account the broader economic situation.

When charting out a profitability roadmap, you need to also consider the ‘why’ aspect. This is important because goals make a lot more sense when you support them with solid reasoning. You should never make a business decision before working out why the changes are necessary and their long-term impact on profitability.

Identifying a profit goal will help you direct your actions and strategies to reach your target. To set a profit goal, you will need to consider the following, depending on the kind of your business:

Fixed and variable costs
Business owner’s income
Fixed and variable operating expenses
Return on borrowed capital
Return for risk
Return for future growth

It is advisable to opt for professional business operations consulting to help set an appropriate profitability goal. At the same time, you can chart out a detailed plan to reach your profitability goal. After you have set specific goals, you and your staff need to collaborate to determine how to change business processes to meet the targets.

You will need to regularly review your business operations to keep the strategies that work well and change or eliminate the ones that don’t. Businesses are dynamic, and what serves you well today may not be effective after some time. So you need to have a process in place to take stock of what’s working and what’s not producing the desired results.

Remember that your business profitability goals will be unique to your business, and tracking your progress toward achieving them is integral to making your business a success.

Analyze the Impact of Cost Reduction Through Strategic Costs and Budgeting

After you have worked out your profitability goals, an effective budgeting system and well-planned cost-cutting can steer you toward achieving objectives. For cost reduction to be effective, you need to focus on operations management with an understanding of strategic costs. Strategic costs are directly linked to the quality of your product or service, customer satisfaction, profitable new sales, and giving your business a competitive edge. Other expenses involved in the day-to-day business operations should be considered as overheads. You should know what aspects of your business make and save the most money. Then, you can drastically cut other costs..

If you have not already, you must create a detailed budget and stick to it. This will make it easier to measure and manage your financial and profit goals. But what exactly is a budget? Simply put, it is a system of tracking your income and expenses. It allocates limits to how much you can spend and serves to visualize your business’s cash flow against expectations to preemptively address issues.

Every expense you make needs to be backed by a solid business reason. If you cannot immediately justify why you are spending on something, it needs to be reassessed and possibly eliminated. For instance, you might have subscribed to a particular recruitment service to help you find new talent, but have you analyzed if the associated cost is worth it? Is the service indeed giving you high-quality candidates that you would not have otherwise found on your own? If the answer is no, then rethink your investment in this extra service. Maybe you can manage recruitment internally through, for example, posting about jobs on social media when necessary.

Another area where you can potentially reduce costs is traditional marketing. There are now multiple advertising opportunities online, and some of them are free or relatively inexpensive. Moreover, they enable you to reach millions of potential customers which can drive significant revenue to your business. So it’s essential to invest in professional digital marketing services to help you leverage the internet and social media to save costs while also making sure you reach your targeted audience.

Further, get greater bang for your buck by regularly bidding out costs. Don’t merely accept price increases from suppliers. Instead, actively seek out competitive bids. It is also worth noting that costs associated with running a business do not have to be ‘set in stone’. You can creatively change them to adapt to different situations. Of course, the most obvious place to start reducing costs is in discretionary and non-mission-critical perks and events such as parties and celebrations. If they cannot be eliminated, you can merge activities into one. For instance, a training day and a celebration can be combined into a single event to save on external resources such as venues, facilities, and trainers.

Simultaneously, do not cut back on strategic costs that will help your business succeed over time. For instance, handing pay cuts to employees can drastically hamper motivation levels and impair productivity. If your employees are essential to maintaining the quality of your products and services, make their satisfaction a priority. Similarly, if an expensive software is working wonders to save you time and human effort, don’t ditch it just to avoid the associated cost. If it’s integral to improving the functioning of your business, it needs to stay.

Analyze all your expenses in the same way, and it will help you tighten your monthly budget to be on track for meeting your profitability goals. You might also want to consider working with multiple suppliers and services to ensure that you’re getting the best price for everything essential to your business. For instance, if you regularly use a courier service, consider using different companies for different packages. This is because courier services typically specialize in sending packages of different sizes, quantities, or weights. So the company that you use to mail documents may not be the most cost-effective when it comes to sending bulkier packages of goods and vice versa. You can adopt the same approach to other services or supplies that you rely on to potentially make a substantial dent in reducing costs.

Set up a Reliable System to Automate and Track Spending

Even the smallest businesses can get complicated quite fast. While creating a budget might be reasonably straightforward, keeping tabs on expenditure can be more challenging, so it is advisable to automate and track your spending. This will improve business processes and increase profit.

There are many basic online banking tools and controls that can help you track your company’s expenses. Set an authority to approve all spending and set limits to transactions, particularly for strategic or high-value expense categories.

Further, there are several user-friendly and even free expense tracking apps that you can integrate into your business. These allow you to simplify and automate your expense tracking by letting you track your time, snap photos of receipts, make statements and reimburse expense reports, all in one place. It’s an excellent way to cut down on admin work and stay on budget, too.

Automation of expenses is especially valuable when you have employees filing expense reports. The manual process of doing this can be messy and difficult to keep track of. Moreover, it often lets errors slip through. An automated system will eliminate the painful aspects of filing and processing expense reports. Effective automation will usually follow the below steps:

When an expense is made, it is logged immediately into an automation tool, preferably a mobile app since it’s the most convenient option.
Visual proof of the expense, such as a receipt, is added with the claim.
A designated approver can accept or reject the expense claim.
If approved, the request reaches the financial department. They can choose to process it immediately or wait until a stipulated time, such as the end of the month.

Processing occurs with just a click, and no additional data entry is required. Such a system can keep errors to a minimum and ensure that everybody spends how they are supposed to. This will work to significantly improve processes for your business.

Increase Productivity With Technology

Technology is quite a buzzword these days, but it is essential to apply it strategically for business process management. Otherwise, it can drive up costs without really helping you meet your profitability goals. The dynamic world of business is changing rapidly, and keeping up with the latest advancements is vital to significantly reduce costs. To harness technology effectively, start by evaluating your current administrative processes and determine the most significant productivity challenges. For example, slow internet speeds or obsolete technology can hamper employees’ performance and morale. So you can make it a priority to proactively upgrade software and hardware. At the same time, you can extend the lifespan of older computers by virtualizing operating systems on offsite servers, which will lower the cost of hardware maintenance.

Further, the world is experiencing a general shift toward dispersed workforces and fewer in-house employees. Consider if this kind of transformation can help you save overhead costs and bolster profitability. Remote business operations can also enable you to hire from a larger talent pool. The right candidates no longer need to relocate to work with you, which can give you a competitive edge. Of course, such a model may not work for all kinds of businesses, so you should make an informed decision based on your unique circumstances.

Digital transformation also makes it easier to provide employees with all the data and tools they need to be more productive. For instance, you can improve communication through streamlining information flow and using software that allow teams to coordinate better. Such tools are often free. Some examples include Google’s cloud-based suite of products, the messaging app Slack, and project management software such as Trello, ClickUp, and Wrike. There are also custom cloud business solutions you can implement to suit your individual needs.

Additionally, customer relationship management (CRM) systems like Salesforce and Zoho keep track of prospects in one shared location that’s easy to manage. This ensures consistency in your customer relations, which in turn works to maximize productivity and profitability. As for managing your employees, cloud-based time and performance tracking software such as Toggl allow employees to keep track of their hours and projects. Automatically gendered reports and insights help all stakeholders remain well-informed, accountable, compliant, and productive.

It’s fair to say that technology brings new possibilities to almost all aspects of doing business. There are now a lot more ways to organize information rather than using traditional spreadsheets. Moreover, you can analyze and leverage the data in meaningful ways to drive higher profitability.

You Can Do It

As the world continues to evolve, so must the way we do business. It might seem daunting at first but it gets easier once you adopt an attitude of innovation and planning better for the future. To sum up, remember that any journey to increase profitability after cost reduction should first start with defining your goals. Once you’ve got clarity on that, the rest of the steps are easier to follow. The trick is to find the balance between investing in the things that will boost your business and cutting out unnecessary expenditure with a view of gaining in the long term.