Cutting Costs the Right Way

Cliff Ennico
Mon, 22 May 2023 21:00:00 -0700
Lifestyle

"We have a retail business (both brick-and-mortar and internet).

We have tried every marketing trick in the book, but we can't seem to push our sales up beyond a certain point due to too much competition.
Updated: Tue May 23, 2023

"We have a retail business (both brick-and-mortar and internet).

We have tried every marketing trick in the book, but we can't seem to push our sales up beyond a certain point due to too much competition.

We need to grow our business but are not sure how to do it in such a tough climate. Any suggestions?"

There are only two ways to grow a small business: either you get more revenue from your customers (by raising prices or increasing sales), or you cut your operating costs in an effort to generate higher profits from the same (or shrinking) revenue base. Hopefully you can do both, but in a highly competitive market, it may not be easy to raise revenue without losing business. In such a market, it's the lowest cost provider who survives — and wins.

Sooner or later, every small business has to tighten its belt. Here's how to do it.

First, understand your costs. How much money does your business spend each day, each week, each month? Do expenses fluctuate at different times of the year?

If you do your bookkeeping only at tax time, you will have difficulty cutting costs. You need to monitor your business spending on a daily, weekly or monthly basis.

Look at your bank account, credit card and PayPal/Venmo statements with a highly critical eye. Where is your money going?

You would be amazed what doing this will teach you. When my software expenses looked suspiciously high last year, I looked at each one of my credit card statements and found out I was paying $500 a year for software I stopped using years ago. These were "automatic renewal" fees that were being charged to my cards each year without notification from the software publisher.

It took a few phone calls, but I was able to stop the software subscriptions from being renewed each year.

Look at your expenses every week, and when you see something that doesn't make sense, start asking questions.

Second, identify your "essential" expenses. These are things you MUST spend money on if your business is to be successful.

If 20% or more of your revenue comes from your eBay account, paying the eBay fees is an essential expense. Now, maybe you can cut those expenses somewhat (by taking advantage of the discounts and special offers eBay frequently offers its preferred sellers), but you have to pay them.

Sometimes your essential expenses aren't obvious. Many small businesses view marketing as a luxury item, but if you cut back on your marketing sooner or later, the phone stops ringing. In a tough economy, it may actually make sense to increase spending on marketing to increase your brand recognition and (maybe) improve sales.

If you find you have lots of "essential" expenses, you are probably not being tough enough with your review. In my experience, most businesses have only a few essential expenses each month; the rest always have some fat that can be trimmed. Imagine what would happen if you cut a particular expense to zero. If you don't know, it's probably not essential.

Third, eliminate "nonessential" expenses ruthlessly. "Ruthless" is a nasty word, but it's the best one to describe what you have to do here. Any expense that is not "essential" to the operation of your business, eliminate it "with extreme prejudice" (Joseph Conrad, "Heart of Darkness").

Why are you renting space for a brick-and-mortar retail store in the age of the internet? Unless you have a killer location (high visibility, lots of foot traffic), consider getting out of your lease early and working out of a home office. Your physical inventory can go in a cheap storage unit (just make sure it's airtight and watertight). Or maybe you should let Amazon handle your inventory and fulfillment through their highly popular Fulfillment by Amazon program.

Do you really need so many employees? Is each one adding value to your business? Can you use family members who will work for less (especially minor children, for whom there are tax advantages)? Can you do some of the "jerk work" yourself without taking your attention away from the big picture?

Lastly, make sure you don't cut costs too much. When you cut your costs too much, the quality of your product or service inevitably suffers. If you start making machine parts out of cheaper plastic rather than metal, they break down at lower temperatures.

It's the same in a service business like mine. If I spread myself thin by taking on too much work, I risk exhausting myself, slowing down my response time, making mistakes and getting sued for malpractice. Control your costs by all means, but make sure your reputation doesn't suffer by being too cheap.

Sometimes you just gotta spend money to make money. Or, as we used to say back in my Wall Street days, "You can't eat like a bird if your goal is to (excrete) like an elephant."