In an uncertain world when every penny counts, the smallest increase in revenue or reduction in expenses can have an impact on your company’s profitability. The good news is a large-scale company overhaul usually isn't necessary to achieve these results. More often than not, there are simple, common sense steps that will improve your bottom line.
Before we really dig into the ways to cut costs, we first need to understand where the business is starting from. Do you know your current profit margin? Do you know what your ideal profit margin is? If not, consider using a business expense program to complement your accounting software so you can get better insights into what money you are bringing in now and where you are spending money.
If this seems like a daunting task, you aren’t alone. There are many business owners who don’t have a clear handle on what their profitability should be targeted to, because there are so many different methods, models, and explanations out there about which is most applicable. As you may have guessed, a lot of this advice is overlapping and can create overly complex explanations. In the end, all you really need to know is which profit margin is the most relevant to you and your business’s needs?
What is net profit margin?
Intuit argues that small business owners should pay most attention to net profit margin. This brings a business owner insight into their sales and revenue trends, so you can better uncover (and then resolve) any weaknesses in the business model that may otherwise be hidden in to-line calculations.
After all, the variables that impact net profit margin can be controlled – or at the very least influenced – directly by business owners. Since you cannot force a customer to open their wallets wider, you can look inward and find opportunities to trim unnecessary costs from the operations side of things.
Before you take out the red pen and start slashing operational costs, be sure to understand which costs are safe to cut, and by how much. Reducing common expenses in these ten areas can provide easy ways to expand your small business’s net profit margin. Added bonus? None of the recommendations should interfere with the core purpose of your business or its ability to grow and expand.
1. Invest in your employees & long-term contractors
It costs more than you think to hire an employee—especially one with in-demand skills or specialized knowledge. Generally speaking, replacing a typical employee costs about 20% of the employee’s annual salary. Knowing this, employers would be smart to do everything in their power to retain talented employees, even if it requires you to spend a bit more on benefits.
2. Align third-party plan costs with usage
Chances are your company is paying for a lot of essential services monthly or with annual contracts. Even if the services are essential, they should be reviewed at least once a year to determine if they are still the best solution to the underlying problem, or if there are changes to the contract that could result in cost savings and time savings.
3. Re-evaluate employee perks
Going along with the first point, in many industries competition for talent is fierce. On top of generous equity packages and time-off allowances, many employers offer perks and fringe benefits in a constant arms race to attract ultra-qualified engineers and designers. Most of these perks have become clichés (foosball and bean bags), and others can cut in to profitability (on-campus free lunch programs).
If you’re locked in a battle to attract and retain talent, try offering more tangible perks, like creating a more comprehensive payroll program, offering early wage access (with Brink’s you can do this at no additional cost to the employer!), and more control and opportunity for each employee to have financial independence.
4. Maximize your employees' skills.
Take a closer look at how your employee’s skills and experience are being used. Where possible, expand responsibilities to the employees with the most efficiency. Try delegating tasks based on strengths rather than purely by availability. While it is often necessary for one person to be responsible for a variety of tasks, you can save costs by considering sending some of those tasks to more efficient employees.
5. Barter or make in-kind exchanges
Before today’s modern global economy existed, we depended on bartering. Most transactions today rely on currency-backed exchanges, but it doesn’t mean that bartering is completely obsolete. By understanding what you need and what services you can provide to other professionals, you are creating the opportunity for goods and services to be swapped without requiring extra costs to come from your profit margin. This can be especially useful if your trade or service is especially valuable among your peers.
6. Buy (gently) used
Along the same lines as above, there is no reason not to consider buying used equipment and materials, where possible. Shiny new equipment has a certain appeal and draw to it, but it also takes the most out of your expense’s column. Take a look at gently used items and when possible purchase those over the brand-new equivalents. You’ll save money without sacrificing quality.
7. Encourage word-of-mouth marketing
The rise of social media created a new kind of conversation and platform for businesses to drive word-of-mouth successes. Not only is it cost-effective, but it’s also an incredibly powerful form of outreach that creates a marketing cycle out of your own customers. You may consider launching referral programs that pay existing customers to refer new customers, creating social sharing communities on Pinterest and other digital media, participating in online review directories, such as Yelp and much more. Consider your company’s audience’s demographic makeup, buying habits, and response to messaging and sales efforts when determining which WOM marketing idea is most applicable to your business.
8. Reduce paper use
Just like we recommend finding ways to reduce your water and energy outputs, lowering the amount of paper used can be great for the environment, but also for your company’s bottom line. If you are still using paper paychecks as payroll for your employees, consider a payroll card like the one offered through Brink’s, as a way to cut the paper out of it. Payroll cards can create a more streamlined, efficient, and user-friendly platform to complete a tedious monthly chore.
9. Separate personal finance from business finance
This is more applicable to small businesses over larger organizations, but it’s a great way to cut your business costs. When you are unable to separate personal costs from business costs, expense management can get very murky. Keep purchases separate, keep accounts separate, and work with a business expense program, to create a clear line of sight on where and how your money is being managed
10. Always review all operational expenditure
This shouldn’t just be done when times are tough and finances are tight. Consider implementing a quarterly review of operational expenses to understand seasonal changes and impacts those costs have on your net margin profit. Perhaps most importantly, take a look at technology and equipment costs. For example, accounts receivables can be put on e-payment systems, efforts to recruit talent can be more focused, and social media can replace more paid-focused marketing efforts.