Cash Flow

4 Ways Businesses with Low Fixed Capital Can Cut Costs

Try these strategies to adapt operations and better control your expenses

4 Ways Businesses with Low Fixed Capital Can Cut Costs

When your business first opens its doors, your top priority may be building a client base, not cutting costs. But as you gain momentum and the company becomes firmly established, keeping expenses in check becomes crucial to your bottom line.

However, according to a 2014 SunTrust survey of small businesses earning between $2 million and $9.9 million annually and midsize businesses earning between $10 million and $150 million annually, nearly three-quarters of owners and executives don’t feel completely prepared to control their company’s expenses over the next six months. The task was especially daunting for businesses in the services and support industry, which have fewer resources to trim than manufacturing firms.

Here are four steps experts recommend businesses with low fixed costs can take to upgrade their operations and control expenses:

1. Treat your employees as stakeholders

“Service and support companies have a lower volume of assets, so they’re relying more on their human capital, their employees,” says William McDowell, professor of entrepreneurship at Middle Tennessee State University.

The best way to maximize employees’ efficiency is to treat them as stakeholders, not just staff members. “You want employees to be as motivated and determined to be successful, efficient and on top of things as you are as an owner or manager,” McDowell says. “Firms that succeed in establishing that healthy, strong, goal-oriented culture will find they are far more effective in controlling costs than targeting cost savings.”

2. Renegotiate contracts with your suppliers

Often, vendor negotiations focus strictly on securing a lower price, but businesses should take more factors into consideration.

“Companies should pay more attention to how much time vendors will give them to pay their bills,” says Charles Goetz, distinguished lecturer of entrepreneurship and business development at Emory University’s Goizueta Business School. If your business relies heavily on vendors, Goetz says you would be better served by asking for 90 or 120 days for payment than trying to save on price.

According to the SunTrust survey, 37 percent of small businesses and 32 percent of midsize businesses renegotiated contract terms with their suppliers in 2014.

3. Evaluate your offerings

The SunTrust survey found that about 20 percent of both small and midsize businesses changed their product mix to help control expenses, and that can be an effective strategy.

“You need to realize what your company’s core competencies and strengths are,” McDowell says. “Identify your main money producers. I see too many people in businesses I work with who let their time be eaten up with things that aren’t making them money or making the company successful.”

Keep listening—to your staff, your customers and the market—to ensure your services continue to address a key need for your clients, and regularly assess whether those services are priced correctly.

”Frequently, small companies underprice their products, assuming it will help with sales,” Goetz says. “This is almost always unnecessary. By reducing your price, you end up reducing necessary cash flow, which can be detrimental for your company.”

4. Outsource your support functions

“Consider all of your ancillary services: accounting, human resources, office management, etc.,” McDowell says. “There are support firms that specialize in those areas so you may want to consider utilizing one of those services as a way to save money and have more control.”

Only 16 percent of small businesses and 18 percent of midsize businesses reported outsourcing in 2014, but the tactic earned one of the highest success rates for controlling expenses.

“It can be an opportunity to save quite a bit of money,” McDowell says.

Make time to meet with your banker regularly and review your company’s earnings, as well as your strategy for reinvesting profits back in the business. Updating your approach to company culture, supplier contracts, service offerings or even administrative tasks can help you cut costs, streamline operations and better serve your bottom line.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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