We all know that there only two ways to increase operating profit namely decrease operating expenses or increase operating revenue. In this equation, it is easier for business to manage operating expenses compared to increasing sales. Even the large corporations restore to job cutting and branch closure when thing get though. What can the small business do? Here we explained 13 ways to control your operating expenses:
1. Group Expenses – Fixed and Variable Expenses
The first key step of managing your operating expenses is to classify your cost into two common major categories; fixed and variable expenses. Fixed expenses are those operating expenses that do not change with production or sales volume. For example include rent, subscriptions, depreciation etc. The variable operating expenses changes as the sales or production volume change. For example raw material or cost of good etc. The more you produce or sale, the higher you would incur variable operating expenses.
This classification will help you to understand which operating expenses are expected to change at certain level of business activity in a given period.
2. Set Budget for your Key Operating Expenses
Now that you have categorized your common operating expenses into fixed and variable cost, you should set cost budget for each of these items. Budget is the business expense plan at given sales, service or production level in a particular period. Expenses budget will help you take control of your key operating expenses.
If you do not plan what to spend in a given period, you are actually planning to spend any amount.
3. Keep Record of Your Expenses
Many small business make a common mistake of not keeping proper records of their major expenses. Well, how do you control or make an important decision about expenses, when there is no record? If you cannot afford to buy small second-hand laptop, use a log book for this purpose. Split the book into two parts; One half to record daily sales and the other half to record your operating expenses. The differences between the two records would be your operating profit.
4. Use technology
Technology helps many small businesses and startups to increase their productivity and efficiency. How does technology reduce small business cost? Well, use email for all not-urgent enquiries to stakeholders like suppliers, customers and even banks. In a similar direction, you can use Viber, WhatApps to perform some business calls.
With technology, you can also save a lot of time and money by avoiding unnecessary travels. Use applications such as Webex and Skype to conduct business meetings with stakeholders in multiple locations.
5. Go Paperless and think Green
According to research by Xerox, about 30- 40% of office printed papers goes into waster. If you add up how much you spend on printing supplies, paper, and labour, you’ll quickly see that using electronic file storage can save you lots of money.
Except if legally required such as financial contract, move to a digital invoice and document management system and file all important paperwork on your computer instead of a file cabinet. Collect email address of your customers and request to send their invoices via email. If in case they insist, give them the hard copy because some people are still using Nokia 3310.
6. Offer Free Expert Advice
One of the cheapest means of marketing and brand awareness is to provide free service to the community. If you run consulting firm, consider teaching a class, speaking at community seminars, or writing an article for a local journals. This will make you look like an expert and create more awareness about your business.
7. Introduce Cost Saving Incentives – time savings
For every core activity in a business, there is a standard time to finish job and a standard output from certain input. Let me explain this concept with an examples. You can introduce cost savings incentives using time savings method. Let say you run a software development firm. You would have agreed the delivery period of each project with the customers say in 45 days from contract date. This is how you could save cost; tell your project team to deliver the project in 30 days and they will benefit from 15 days savings of time as a bonus. Your benefit is that the developer can start another project on day 31.
8. Commission your sales force.
If the big businesses are still using commission system, why not small business and startups. Change the formula of calculating your sales team total salary. You could use the base salary + commission. The commission here means you will pay them say 1% on every sales. Therefore, certain increase in staff cost should be related to increase in sales.
9. Negotiate and ask for Discount
Feeling shy to ask for discount is one of the bad habits that affect small business growth. So, the next time you are buying stocks, stationaries or engaging consultant, ask for discount. If the seller say “NO, it will not take anything from you and he/she say “Yes”, that will add something to your pocket.
10. Consider Outsourcing or Interns
You do not always to have to employ full time staff for activities such as accounting, legal or marketing promotion. Bring in an intern, freelancers or consultant to do these jobs until when your business grow. You will only pay the consultation fee or intern allowance. For example, an accountant can review your records on half-yearly basis whiles an intern could perform basic sales support. Using an intern is a win-win situation. The Interns get valuable experience, and you also enjoy low-cost labour.
11. Learn something new.
As a small business, you have the flexibility to do certain things by yourself. Once again, you do not always have to pay a consultant. Learn how to Do It Yourself (DIY). For example, you can learn how to prepare VAT return instead of paying someone to be doing it for you. As a matter of fact, this website is maintain and updated by someone who has never sit in a software development or maintenance class. DIY can help you to manage operating expenses.
12. Compare Prices before buying
Let me share one major procurement secret of the big firms. They always ask for quotations and compare prices before buying any major service or item. So, the next time you are planning to buy something major, kindly collect quotations from at least two vendors. Compare the price, quality and delivery time and choose the best one. Again do not hesitate to negotiate the price with the chosen supplier.
13. Barter your goods or services
Barter is an exchange of goods or services for another good or services. If you are a technology firm who need the service of an accountant, consider given them a free IT service and request them to prepare your financials.
Managing your small business operating expenses means only one thing: more profit for you. By looking at these 13 areas, you’ll be able to control your expenses and increase profits.
Now to you. Do you have more ideas of saving money for small businesses? Every little helps, so share your secrets in the comments below!