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- The following are the top seven ways to reduce your business costs to use as part of your cost management strategy:
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The COVID-19 pandemic has put the world in a financial meltdown. Not only has it affected millions of lives, but it has put the global economy to a halt—the declining demand for goods and services with surplus stocks haunting business owners in today’s primary issue.
That means there is a significant decline in demand for a company’s product, taking a toll on their finances. As a result, most companies are going out of business, and those who remain in operation are barely surviving.
This development has left many individuals wondering how to react to this alarming situation. So, the real challenge to most business owners is to decide whether or not to continue operations. A few advice on what to do are below, but if you want to dive deeper into knowledge you might consider visiting special training courses (e.g Lean Six Sigma Training course).
While the answer to this problem might be simple, it requires considerable input from anyone willing to walk that path. Try and start by realizing that your current resources are your only assets to continue operations. It would help if you spent some time planning how to use them efficiently by cutting down on the expenses and tracking your investments. That should allow you to pass this phase and reach a point where your business starts generating profits again. This article discusses significant cost-reducing strategies to survive the challenging times to put you on the right track.
The following are the top seven ways to reduce your business costs to use as part of your cost management strategy:
1. Get A Business Expense Tracker
Gone are the times of old-school manual bookkeeping. The traditional bookkeeping method lacks accuracy as it involves recording transactions manually, which gives a chance of errors occurring. There is no easy way to record credit card transactions and purchases on credit.
A better way to track your business’s capital and variable expenditures are to automate this process by getting a business expense tracker app. That app will enable you to save time and keep you organized. Experts carefully design these apps to help trace the finances of small and large-scale businesses. These allow companies to designate budgets and stay within them to meet their goals. And since the process is digital and automated, it’s easier to operate with fewer chances of error.
2. Evaluate Your ROI Objectives
Before encountering this phase, you must know the returns you should expect from your investments in a given period. However, with the outbreak of this pandemic and declining demands, you should also adjust to your ROI objectives.
The best way to go about it is to wait for the results to come in so that you have some data to support your conclusions. But still, you can make deductions from circumstantial evidence and expect it to take longer for your resources to replenish. You need to limit your production facility to produce a minimum inventory that meets the demand. That will allow you to utilize your current resources efficiently and save the working capital for future expenses.
3. Determine Your Fixed & Variable Expenses
Every business has some primary requirements that you can’t compromise upon and some variable ones that depend on other factors. While discussing finances and cost management, these get referred to as fixed and variable expenses.
Make sure that you have a separate list of the two and are drafting your budgets accordingly.
- Fixed Expenses: Remain constant for some time. Some examples include; rent, insurance, salaries, and loan payments.
- Variable Expenses: These are directly proportional to the production output. Some examples include; raw materials, packaging, electricity bills, etc.
Try to get a professional on board while making these assessments to keep the process streamlined and efficient.
4. Adjust Your Variable Costs
With a clear understanding of what variable and fixed expenses mean, you can start adjusting your variables costs. Downsize your staff and limit your operations to match your income. Look for ways through which you can continue working without compromising on the quality or delaying production. Try to get bulk discounts on your orders, and if possible, work on centralizing the purchasing process. If you have regular vendors, then you might want to review their contracts as well. These can help tame your finances.
5. Minimize Your Fixed Costs
If you are downsizing your operations, then you need less space to continue them. Your production, warehousing, and energy costs will reduce. And with less work on hand, you can also consider the option of outsourcing tasks to cheaper vendors.
It’s also a good time for you to start looking for new vendors and go-green to lower the energy costs. All these things individually might not make a huge difference. But, when put together, it’s easy to notice the drop in maintaining operations’ overall cost.
6. Use Accounting Software To Devise A Cost Management Strategy
With all your finances before you, you need to start feeding this data to your accounting software. These programs allow you to make comparisons of your current expenses with your estimated budgets. That way, you will have a budget-to-actual report in hand while working on a cost management strategy.
Use the data at your disposal to outline areas that consume the most of your finances and work on ways to bring it down. Avoid the unnecessary expenditure from this sheet in the future and allocate funds to recurring costs. That way, you will have a better idea of the overall expenses and plan accordingly. You should also integrate your accounting software with an automated invoice processing solution. This way you wouldn’t have to be worried about any late payments, human error, or accounts payable fraud cases.
7. Lower Your Break-Even Point
Lastly, try working on lowering the break-even point for your business so that you can start making profits even sooner. The break-even point refers to the minimum income you need to generate to cover your costs with zero profit. It means that if the combined sum of your fixed and variable cost amounts to $30,000 and revenue is also $30,000, then you are at the break-even point. Any money you make above that registers as profit can use it as investments or keep it for personal use.
No doubt, we are going through a challenging time where most businesses are struggling to keep afloat. But with the help of cost management strategies as mentioned above, you will survive this struggling phase of the pandemic with less difficulty.
Thank you for reading!