Connections for Success

 

08.11.20

How to Cut Your Monthly Business Expenses as You Grow  
Chris Arndt

Now is a better time than ever to get your business spending under control. Unlike most accountants, we like to focus on growing your business, but certain times call for cost-cutting measures. Better yet, if you can cut your monthly business expenses as you are growing, then you are creating a great capacity to scale.  

Reforecast, Then Evaluate Costs

How agile is your budget? Did you build in any contingency plans or room for flex? If not, as a business owner in a COVID-19 climate, you may be looking at a need to reforecast completely and defer expenses where possible. Whether you are hoping to cut business spending or looking to build capacity to scale, here are six easy-to-grasp strategies to cut your monthly business expenses.

Six Strategies to Curb Your Business Spending When Growing Your Business 

  1. Update Your Expense Policy
    In our blog post, Is it Time for Your Company to Draft an Expense Policy? we discussed supporting your standardized procedures with things like a schedule and a list of qualified expenses. Revise these lists to further curb spending in unpredictable financial climates. 

  2. Team Transparency and Education
    With transparency comes responsibility and accountability. When employees know what is on the line, it becomes easier to rally them. Avoid burdening them with the full financials of the company. Instead, focus on the line items they can control.

    For example, “You spent this amount on office supplies last quarter. What can you do to be creative and cut this by 10%?” If you are the CEO, there are only a few areas that are going to warrant your time to review. But for other people in the company, an expense item might be 100% of their world. This feeds accountability and the feeling of having an effect on the company. Even if it does not hit the bottom line, if your employees can find a cost savings of 20%, celebrate the win. For employees who are curious and want to learn, they will likely want to dive right in.

  3. Review Your Personnel Structure
    We are not going to tell you to lay people off.

    Administrative roles should be examined for efficiency and effectiveness. For example, if you have clerks on staff that spend time entering data for reporting purposes, scrutinize the usefulness of those reports and consider whether those reports could be automated; however, we are not suggesting replacing people with tech. Instead, increase efficiency within that team to create a capacity to scale. Pay the one-time implementation fee for that automation instead of hiring more staff and you have freed up time in your clerk’s day to take on more tasks.

    If there has been little turnover in your team, the supervision requirement of management roles should lessen each year. Look to fill those gaps with tasks that have a direct return on business development.

    Finally, if you are planning to hire, but wish to continue cutting your expenses, you might want to outsource to save on benefits and associated overhead costs. Our experience with clients indicates that outsourcing reduces administrative costs while simultaneously improving performance. Alternatively, you might look to merge roles to take on more responsibility for a raise. This is still a savings compared to hiring a full-time employee.

  4. Swap Fixed Costs for Variable Costs
    In order to get creative with your cash flow, ask your controller where you might be able to swap fixed costs for variable costs. For example, reducing fixed salaries of your sales team by offering them a higher sales commission can be an attractive offer to your A-list salespeople. For service-based companies, you might employ contractors to swap fixed costs for variable costs.

    After cleaning up the financials of one of our newer clients, we noticed that their staff was being underutilized. When the employees were working directly on a job, their salary cost got moved into the costs of goods sold (COGS). Anytime the same staff sat idle, we had their salary costs moved into an account in the overhead section titled “underutilized employee salary.” We quickly realized that they were accumulating $20,000 in unused salary costs every month. In a people business, you might expect a one-off month where people are not fully utilized, but if it is a consistent issue, then you are not staffed properly. That is money you are tossing out the window (or into peoples’ pockets without any return).

    In a case like this, hire staff to cover 50-75% of your expected workload or whatever you can consistently maintain, and then utilize contractors to make up the remaining percentage if you get more work (i.e., revenue). Trust me, you will sleep better at night. Contractors are available to hire if you need them and you do not have to worry about letting people go if the work is not there. While you are giving up some gross profit margin on the incremental work during the higher revenue months when you flex up, when you have a bad month, you are not stuck paying fixed salaries for staff simply because you do not want to let them go.

    Another alternative is to pay overtime to your current team instead of hiring subcontractors when you flex up. It is a win-win; they make more money and you still pay less than you would have if you were contracting out. In general, overtime is a useful solution across industries, not just those that use contractors.

  5. Involve Managers in Building Your Budget
    Bring in your tactical managers from each department to adjust your budget for growth. Additionally, by shifting to a zero-based budget, you can identify and isolate those expenses that are most essential to your operations and dig into anything that you may have dubbed “miscellaneous expenses.” You can consider cutting or temporarily deferring any leftover expenses.  I talk a lot about how a budget is a stake in the ground. It is not really a great standalone document after the first month it has been made. Instead, use your budget as a tool to build rolling forecasts to set targets for managers to work towards.

    Related Read: Don’t think a zero-based budget can be geared toward profitability? Think again.

  6. Review All Monthly Recurring Costs
    Take a hard look at the business expenses you are incurring monthly and determine whether they are all essential to your bottom line and, more importantly, if they are driving growth. Defer or pause subscriptions or memberships to quickly make cuts to cash expenses. Now is the time to really examine the ROI on those kinds of items.

    Try getting creative with these six strategies before assuming that cutting your monthly business expenses has to mean laying people off. Plus, if you are a growing business, cutting costs can simply mean a new ability to scale profitability. And what is more awesome than that?

    For more information, contact Chris Arndt at carndt@orba.com or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services. 

Book your free consultation today

Leave a Reply

Your email address will not be published. Required fields are marked *

Forward Thinking