1) Gross Profit Margins.
Is the margin deteriorating? Figure out why. Can increases in direct costs be passed to customers? Can a product be reformulated or redesigned to cut expenses?
If you offer different products, figure out their individual gross profit margins and mix. Look carefully at those with low profit margins to see if the carry their own weight, so to speak. Would it make more sense to drop them from your line?
Payroll costs are a significant cost in most businesses. Examine your current plant layout: would a more efficient system or automation help you reduce labor costs? Implementing these solutions does require an initial investment, but that is more than offset by future savings. If you have seasonal variations in business, temporary employees and subcontractors can pick up the slack at a lower cost than full-time, permanent employees.
Another step to take is to review employee classifications for workers’ compensation insurance; you could be paying significant premiums for misclassified workers. Also, look at your group insurance programs. It is good practice to solicit bids every three years to ensure you’re getting the best rates. Opting for higher deductibles lowers your premiums, yielding more savings.
3) Phone and Postage.
Are you paying for services you don’t really use? Can you decrease phone calls or use them more effectively? Contact your provider to discuss rates or shop around. The same applies to shipping and receiving carriers. Where you can realize cost savings?
4) Credit Policies.
According to the 80/20 rule, 80% of your revenue comes from 20% of your customers. Take a hard look at the other 80%. Is it cost-effective to continue serving them? Also, consider the average length of time it takes them to pay: longer periods greatly increase your risk of loss. Is soliciting new customers a better strategic move?
5) Inventory Levels.
Obsolete and “stale” inventory is a tremendous cost. Can you rework it or sell it for salvage to offset this?
6) Fixed Assets.
Like inventory, excess equipment and machinery are a drain on profitability. If you depend on assets that are subject to rapid technological change or use others only infrequently, weigh the benefits of leasing over buying.
7) Purchasing Policies and Costs of Supplies, Products, or Raw Materials.
It’s important to understand the competitive landscape and prices charged by other suppliers. Compare these to your own; this gives you the insight you need to renegotiate pricing or switch to another supplier.
8) Employee Suggestions.
Your people often have ideas to cut costs that you may never have considered. Encourage them to share; you can implement a bonus program based on the percentage of savings their idea generates. Be careful to analyze the impact and long-term costs. You need to avoid the “quick fix” - and also the costly fix!
Review your expenses regularly. The worst time to do so is when you’re in the midst of a financial crisis. And avoid the temptation to make sweeping decreases. Making across-the-board cuts in panic mode is rarely effective as all areas of the business do not contribute equally to its success.
There are frequently more cost-cutting strategies that you can put to work to boost your profitability. If you need help finding them, call us today.