8 Ways of cutting costs in a business

01.12.2016 · Enterprise finance

As a rule, managers start to explore financial problems when a company doesn’t have enough money to pay the bills and the income becomes too small. This is the most common case when economists, managers are looking for ways of income increases. There are two methods to decide the problem. The first - finding ways of revenue growth and the second – cutting costs in a business. In this article we’ll show the second way, because it is more effective than the first one.

Rule 1. Determine all company’s exes

First of all, we have to determine all company’s exes. As a rule, they divided according to the type of activity: operational, investing and financial. If there is a problem to determine all expenditures by managers, you have to ask accountants to show the company’s balance statement for the last year and the operational accounting documents. Make the audit and analyzing of all exes.
The operational exes consist:
  • material costs – the cost of material, stocks, that are buying for a product producing, in trading – it is a cost of products that was buying from wholesalers;
  • salary fund – it is a fund of salary, bonuses and other rewards;
  • social insurance - mandatory fee imposed on salary fund, in US this fee is 10%.
  • depreciation – it’s a cost of a capital assets that white out every year;
  • other costs – it’s commercial costs of the company.

The financial exes consist:
  • bank interest costs;
  • other financial costs.

The investing costs are:
  • costs of share participation;
  • other investing costs.

Analyze the dynamic of these costs and find the reserves of minimization some of them.

Rule 2. Consider the exes type that can be cut withought the negative influence on the output.

As a rule, a company can find the costs that can be cutting in another costs.

Depending on the periods there are: express-cutting methods (within a few days), fast cutting (within a couple weeks or months) and the planned cutting (it provides within some years).

Express-cutting methods

1. A company uses this method when there are expenditures for the managers resting, abroad educational programs, buying free tickets for the enjoy-events, expensive airplane tickets and others. Remember that income is not the source of these expenditures, and the costs don’t lay on the operational costs and accordingly to the product price. It will be good to review the educational and outsourcing services costs.

2. Check the telecomunication costs, peharps there will be the ways of cutting its amount.

3. It's adviseble to analyse the delivery costs and to be shure that using the outsourcing services is more profitably for the company.

Fast cutting methods

4. Cutting the matherial costs. There are several ways to decrease the meterial costs. It is proferably not to use this method in manufacturing, because it can make an adversely affect on the product quality. But it is advisable to find a wholesaller that can suggest the goods with the lower prices.

5. Cutting the salary fund. This method a company can use in the case when the productivity falls. Then menegers can choose two ways to deside it: the first one - to perfect the motivation to work more productively and the second - to fire personnel or decrese the salary fund.

6. Depreciation. There are different methods of depreciation that a company can use for the income increase. Useing the accelerated method of depreciation company will have less income in the first period of its activity then in the rest periods.

7. Cut the repair costs. Very often company has not the desire income because it spend a lot of money to the repair of the accomidation, offices and other. Company also have to chose cheaper building if the rent value is too big.

Planned cutting methods

8. The main ways to decrease operation costs are related with rationalization of energy and stocks useing. A company have to look for new and high-tech technologies that minimize the energy costs. An effect from investition programm will be shown in a several years, but this way can cut not only the material costs but a salary fund also. As a rule useing of automatic equipment needs less work of personnel. These method works in a long term perspective.