Geoff Steer offers his top four areas in which to trim costs, plus two traps to avoid when you trim budgets.
In many industries such as retail the screws continue to tighten and I am seeing cost cutting increasingly become a focus for more businesses.
But how do you cut costs effectively, without sabotaging future growth?
There are some tricks to getting cost cutting right, and some regular traps.
A common trap is to focus on minute details. This thinking leads to incidental costs, such as stationary, which have minimal impact no matter how hard you cut.
Business is better served by focusing on big ticket items, which include:
1. The cost of sales: Purchasing or manufacturing product is often your biggest cost, and when times are tough there may be an opportunity to renegotiate trading terms. If you are an importer, make sure you are getting the full benefit of the high Australian dollar. You may be able to trim costs by reviewing your supply chain and ensuring it is efficient; there may be a chance to consolidate certain processes and remove costly steps in the supply chain.
2. Wages: Your staff represents a major cost but also a major asset and business needs to tread carefully. When reviewing any cost it is imperative to never lose sight of where revenue is coming from. Losing good people can be disastrous revenue-wise and have a lasting negative impact on company culture
Rather than cut staff, focus on bringing them along. Use the tough environment to challenge the team. Try and turn it around together. Put it back on staff that business success is dependent on them. In doing so, you will find out which staff are most crucial to revenues.
3. Rent: Business is always in a better negotiating position on rent when times are tough. There are limited options but if your lease is up for renewal there may be an opportunity to negotiate on different terms.
4. Marketing and advertising: Often the first areas to be cut but again business needs to be careful they are not also cutting revenue generation. If you have a good relationship with your marketing and media agents you may be able to save money by negotiating better deals. When advertising, don’t just go by the rate card, push for a better deal. And consider opportunities such as distressed advertising.
Trimming some or all of these big ticket areas may give you some breathing space. But another way of keeping costs at bay is to avoid walking into common traps:
Trap – super payments: Business may be tempted to fall behind on superannuation guarantee payments, but it is not worth it. Not only are you doing employees a disservice, penalties apply and late payments are not tax deductible. Further, following recent legislative changes, directors can become personally liable for outstanding SGC.
Trap – tax debts: The ATO has been lenient on tax debts for the past few years but there are signs the ATO is increasing its debt collection focus. Interest on outstanding tax debts is higher than borrowing from a normal bank, so avoid using the ATO as a banker.
Geoff Steer is a founding partner of Matthews Steer Chartered Accountants.