Format of this article:
- Useful Cost Saving Ideas for Small Business
- Ways to Save Money in Business: Yearly Top to Bottom Review
- Take discounts for early payment
- Give discounts for early payment
- Scan for duplicate payments
- Shed unnecessary IT
- Check the quality you are buying
- Shed excess staff
- Perform workflow analysis
- Question everything
- Hire a CPA
Just like the turtle, slow and steady wins the race in business cost saving ideas. This article will help you enact easy measures to save money by cutting costs. You will learn how to review costs periodically to lower expenses. Also, you will see how offering and taking vendor discounts creates revenue.
Our list of 10 money cost saving ideas for business is unique in its direct focus on actionable cost saving techniques. By the time you are finished with this article you will learn to question everything in your business. This mindset will keep more money in your pocket.
Innovative Cost Saving Ideas
Cost control is not a one-time practice. Nor is it a yearly venture into your spending habits. If you work under either of these assumptions, your risk of failure increases many times. Cost control in business is an ongoing, company wide process, that should include everything and everyone. Where you buy materials for production and where you buy gas for the fleet, should be reviewed. Sound easy? Of course it does, but the reality is far different. Getting your staff on board will take time, patience and persistence. How then, do you get from a cash hemorrhage to cash bonanza in your bank accounts? It won’t happen overnight, nor will it be easy, but if you stick to a plan, you can get there.It’s not how much you make, it’s how much you save.
Fight to Win
Just like the turtle, slow and steady wins the race in cost control. While many say business moves fast, it doesn’t. Business appears to move fast to those that are behind the curve to begin with. Just because one has a deadline, it doesn’t mean business is moving fast. Get your work done and you won’t feel the pressure of time. Lag and the world seems to fly by. This amplifies the point of cost control measures. If you lag in enacting control, the money will seem to shoot out of your business quickly. Left unchecked, your losses will mount until they absorb all free cash, credit and other funding. Failure in your duty to your company, employees, lenders and investors is not an option. People depend on your success, don’t let them down. You now have help with cost saving ideas for business.
Far too often businesses only look at earnings matrices in cost control. If you perform this way you will lose money, beat your head against a wall and possibly close your doors. Why go through the pain and suffering when you could increase your earnings through savings? In this instance you need to watch every penny that flows out the “cash spigot”. The cash spigot refers to any point of your business where cash exits and does not enter. You can turn it up by spending on every shiny new item the vendors push on you. Alternatively, you can slow it down by installing motion sensors on your lighting.
Let’s look at some realities of wasting money when running a business. Every dollar you waste means you have to earn several times that amount to make up for it. What if I waste a dollar and my business has a 10% profit margin? How many dollars do I have to earn to get that dollar back? One dollar divided by 10% equals 10 dollars. The reality is, every dollar that you save takes you a lot longer to earn in revenue. Consider if your profit margin is 7% or 3%, it gets even worse. I worked at a company that had a 7% profit margin and found a way to recover $10,000 from two vendors. The result: The company would have had to earn an additional $142,847 to recoup that money (10,000/.07). A penny saved is a penny earned, this adage transcends time in cost savings.
How much waste is there in manufacturing each year?
There is approximately 10 percent of global GDP wasted each year in manufacturing.
Now that you know how much saved money is worth, when should you perform your cost control activities? The answer is that you should never stop, but at a minimum the yearly review is mandatory. Your staff should be on a never-ending quest of cost saving measures. In some circumstances you can’t achieve this, so the next alternative is to have a yearly cleansing. Even after haranguing your employees for weeks, you may have to use the minimum. There are ways to get employees on board through slow indoctrination, but it does take commitment for management. For our purposes, let’s say you failed and can only do the minimum cost control measure. This means that every twelve months you will be playing catch-up. Also, you may discover some things that really make you mad that no one found them sooner.
Here’s your yearly review process. Utilities should all be looked at. The best way is to compare the data on the bill. Many utilities give you last years data on the invoice. If they don’t call them and have them email you a 2-year usage statement to review. Any usage deviation needs attention. Next are the ancillary utilities like cell phone, gasoline and postage spending. These things cans spiral out of control quick. Employees that buy gas without considering that the station across the street is fifteen cents a gallon cheaper, are costing you money. Many of the other items to consider are covered below in a specific category. The main thing is to look at spending and always ask, “can we be doing better at saving money”?
What is a good vendor discount rate?
Most vendors will offer 1-1/2 percent discounts. Some may go as high as 2-3. If you can squeeze a vendor for 5%, you will be in rarefied air.
Another innovative cost saving idea is taking a discount for early payments. Many vendors will offer a discount for early payment. On the invoice it looks like this: 2/10 net 30. How this translates is “you get 2% off if you pay within 10 days, otherwise it’s all due in 30 days”. I’ve seen every discount from .5/15 to 5/5, that 5/5 was sweeeeet. In any case, when a discount was available, I took it. People sometimes think that 1 or 2 percent is meaningless. But is it really? Here’s a real time example of what can happen when “taking the discount”. Your company has several vendors that offer 2/10 net 30 on billings of $100,000 per month. By paying early you just saved $24,000 (100,000 X 12 X 0.02). Go back to section one above and now calculate how long it would take to earn the $24,000 you just saved? Take the discount and increase your cost reduction of purchasing.
How much should you provide as a vendor discount?
While I would always shoot to avoid giving a discount, it can be advantageous. If you can provide a 1-1 1/2% discount and get paid in ten days instead of 30, you come out way ahead.
Without getting into a lengthy, boring, nerd discussion of how your money is worth more in your hands than in others, let’s look at what happens when you offer the discount. In other words, you give up 2/10 net 30 in exchange for receiving cash faster. Considerations like your line of credit (LOC) interest rate, time value of money and other items have a hand in this. The calculation for determining how much you should offer is way out of the realm of this article. Instead of going down that road, let’s stick to the basic premise of business. “Get your money as fast as you can and don’t look back”. The phrase, a bird in the hand is worth two in the bush, applies here.
The world is full of scofflaws, don’t become their victim. Enact some cost control. Everyday companies lose countless dollars to customers that will never pay. As the length of your receivables aging grows, the chance of collecting becomes low. Do anything you can in order to secure payment. Set up ACH, PayPal, Square, accept cash or checks, whatever it takes to get your money! Just stay away from Bitcoin in any form. I hear business owners complain about the cost of using credit card services, don’t be one of these people. Your cash flow depends on casting off this archaic way of looking at finances. All movements of money include a risk factor, be it interest payment or risk of loss. In the long run it’s better to pay 1.5% on $10,000 ($150) and get it all. Than to collect $9,500 and lose $500.
Why should I pay early and take the discount?
I worked at a company that never missed taking a discount. over the course of the year they were able to save over $50,000. You may not think that 2% is a lot, but expand that out over 25 million in purchases and it goes a long way.
One of the best ways to save money in business is not letting go by accident. This happens when you repeatedly pay the same invoice. A test I used in accounts payable was “Same, Same, Same”. You sort the payables list by vendor, invoice number, amount. You then look for matches that could indicate the same invoice was entered in the system two or more times. This is a good practice to perform every three to six months. Everybody can make mistakes; this test helps prevent purposeful and accidental errors. Additionally, good separation of duties can stop over payments. By having proper purchase order, receiving and invoice entry, you can save money. Cost control is about setting up sound procedures. Proper processes stop payment of an invoice that’s for more product than you received or ordered. Watch for employees giving discounts on sales. Always have second verification for this. A rogue receivables clerk can cost you cash flow.
Are duplicate payments a problem?
You bet they are. Many large companies do not have a comprehensive way to catch duplicate payments. This leads to thousands in losses yearly. When you add in payments to fake vendors, that number can double.
One of the lead ways to save money in business is to reduce your weight. Having a heavy system is costing you money. Whether there is increased Software as a Service (SAS) costs, or the training is more involved, you’re wasting money. Some companies have been oversold on their accounting and other platforms. This is indicative of creep. That process where you pay more for the same or less service over time. Every so often review your software and IT process. Sometimes you are paying too much for a system. Sometimes your paying for product you don’t need. Other times you are training employees on a complex system that is unnecessary for your business. In all these cases you’re spending too much. In my experience, many companies are using services they don’t need. By the same token, you could be using inferior software. This leads to money loss also. If employees are spending time on double entry, work-arounds and other patches, it costs you money.
How do you stop payments to fake vendors?
The best way is to institute a mandatory second signature for all large expenses. At a minimum there should be a routing system in place from the purchase ordering through to AP. Properly moving documents (shipping, receiving, PO and invoice) can save a lot money.
Similar to review of IT, you need to review product price and quality on a constant basis. The company that’s been selling you rebar for the last six years may have raised prices faster than the competition. Without vigilance, you will be paying more for the same quality you could get elsewhere cheaper. Your purchasing department should be on a never-ending quest for better quality at lower prices. Over time this department could become lax, and over friendly with the suppliers. This results in wasting your cash. Another department that should be watching prices is the accounts payable staff. They see prices and billing on a daily basis. Be sure they understand that saving the company money is everyone’s job. By instilling this into them, they may catch some inflated pricing. Lower quality isn’t the issue, paying too much for it is, when considering cost control.
How much time does the average employee waste each week?
While 10% is the average that employers report in wasted time. The true figure is more likely in the 15-25% range.
I’m not saying that you should fire half your staff, but I bet you could do without 10-15% of them. Familiarity breeds contempt. In a business setting this means you have ten people doing the work of 8-9. Everyone gets comfortable in their job, over time they do more non-value-added things. Surfing the web, social networks and starting their own side-business are time-theft ways employees cost you money. The last several businesses I’ve worked cost control for, had several slots that could have been downsized. Employees duplicating tasks, loafing and performing personal errands on company time were the norm. The average business loses 10-25% of employee time to non-work tasks and wasted time. The best ways to attack this situation is to have mandatory job rotation and vacation policies. There’s no better way to see if you can do without someone than to, do without them for a while.
What is the most common problem with workflows?
The most common problem with workflows isn’t the design, it’s human error. Not knowing how to properly use a workflow design is worse than a poor design.
Work flow encompasses every process in cost control. Everything that happens in your business from accounting procedures to production routines fall in this area. Some think that just because the job is getting done, it’s the only way. Nothing could be further from the truth. If your accounting department is playing merry-go-round with documents, you have a problem. Routing paper from person to person for needless reviews and double checks needs to be addressed. In manufacturing the same type of rule applies. If product is moved one extra time than it needs to be, it costs money. If the process points are scattered and inefficient, your wasting money. In retail we find the same thing. If receiving merchandise is done haphazardly, find a better way. The ideal place to start in all these situations is to put out questionnaires to employees. Go to the source for bottom up review.
Where is your idle cash?
If your idle cash is sitting in a savings or checking account, you lose. There are far better opportunities with stable stock and bonds or at a minimum a high yield money market.
Cash sitting in a bank earning .003% interest is costing you money. Sitting in inventory for weeks, it’s costing you money. Paid to suppliers early, it’s costing you money. The first item, cash in the bank is the easiest to remedy. If you have excess cash in the bank you can do several things with it. You can let it sit earning you fractions of a cent for every dollar. You can find better investment vehicles. Or you can pay down lines of credit. This is no easy decision, but you need to know how to look at each in cost control.
Investment vehicles can be CDs, stocks, bonds and other securities. First, you need to look at your cash needs in the upcoming period. As well you need to consider your risk tolerance. In addition, you need to consider, when you will need this cash. CDs purchased in ladder steps will help the average business. In this investment you purchase CDs with varying maturities (6-month, 1 year, 18-month, etc.). As one matures you roll it to the longest period. In this way you have an investment maturing ever six months. Some businesses prefer a more aggressive approach. In these circumstances you do not have an upcoming need and can leave your cash for longer periods. These companies will often invest in stocks or bonds. There is an increased risk of loss with this strategy. Either method is based on when you need access to cash.
Cash sitting in inventory is a bit more difficult to control. In these situations, you need to enlist someone versed in cost control. Someone that knows the ins and outs of Just-in-time (JIT) processes and how to order is crucial. Knowing how to order is more than just filling in a form a hitting the send button. Ordering takes statistical ability and planning. Order levels, order costs and various other factors need to be considered. As well, the cost of running low is at issue. Order points and low inventory triggers do not create themselves. They come with experience and planning.
The final area in this section is paying bills. Paying bills early will cost you money. If a vendor gives you the terms of 30 net, take it. Never be the “early bird”. The longer cash sits in your possession the more you make. That cash could be invested in CDs, securities or other vehicles as mentioned above. Like many financial calculations, I will not bore you with the details. I will just say this, it may look like a small thing to pay bills early, but it’s not. The amounts build up over time and turn into losses, or unrealized cash, for you.
The last item in cost control is perhaps the most important. Question everything. Just because someone says X is X, is it really? Do they know that for sure? Or are they guessing? Or worse, are they lying to you to make you stop asking? In any of these cases, you’re once again losing money. When I started at a company a while back, I asked a simple question about an invoice. I was told there was nothing we could do about an added charge the vendor was placing on every bill. I did some research and found that they shouldn’t have been paying this charge (for the last several years). After a tense three-month battle, the vendor returned all the excess charges (almost $10,000). Question everything.
When it comes to business cost saving ideas, all processes, people and systems are to be scrutinized. Sometimes this leads to harsh decisions. Sometimes it leads to realizing harsh things about the staff. Other times it leads to harsh lessons. Every experience is a learning experience and should be viewed as such. Fool me once, shame on you. Fool me twice, shame on me. Don’t be in this position. Take charge of your business and your CASH! If you wish to seek professional cost control help, contact us here.