Cost reduction tips for SMEs

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Cost reduction tips for SMEs

About half of all new businesses fail within the first five years. While most entrepreneurs focus on increasing sales to stave off collapse, lowering expenses is equally or perhaps more important when trying to achieve or maintain profitability.

Cutting business expenses requires some tough choices and trade-offs, but it doesn’t have to be a painful process, nor one that fundamentally alters your business plan. Many, many business owners before you have put to use these straightforward strategies to trim overhead, streamline operating expenses, and ultimately increase profitability.

Here are some strategies on business cost optimization to implement today and save money tomorrow:


Use the 80/20 principle.

Pareto’s 80/20 principle states that 80% of the outcome is caused by 20% efforts. You can apply this powerful principle to limit expenses on that 80% of activities that are not generating enough income for you.

Think beyond the cash, Barter.

When that cash supply gets low, which is a common thing in the case of small businesses, don’t close the door to getting what you need. Consider the age-old practice of bartering. As with any negotiation process, the worst answer you can get is a simple no, and you might be surprised by how quickly you’ll hear a yes.

Track inventory closely.

If you run an inventory-based business, carrying less inventory means having less money tied up and more money in the bank. Begin monitoring inventory more closely to make sure you aren’t spending more than is really needed. If you manage inventory manually, consider adopting an inventory management software to keep better track.

Be more aggressive with past-due accounts.

Make a list of customers whose payments are past the due date. Start calling them and follow up on the payment. Get aggressive and express your urgency with them. If you do it right, some customers might release the payment on the same day.

Master time management.

Time management skills such as prioritizing, setting S.M.A.R.T. goals, and prior planning can make all the difference in your process of business cost optimization. And while some time management apps help with productivity, others allow you to maximize the company work for better results.

Goal-setting, decision-making, focus, communication, and even patience —  are all among the time management skills for a business owner to develop. Time is money, after all. Once you learn how to handle it in the interests of your business, the financial benefits won’t take long to reveal themselves.


Re-examine your business budget.

No proper financial management is possible without a working budget. With a clear idea of what money you have and spend every month, you’ll understand what business costs to reduce effectively. Add a business budget examination to your to-do list every month to see what’s going on and consider all possible optimizations. Timely audits are what works best to ensure you keep out of debt and forecast which months you may be tight on money to re-organize all the business expenses accordingly.

Review all expenses, even the little ones.

You can’t manage something which you don’t track. If you are not keeping a record of all your expenses, you should start doing it right now. A good accounting software can help you categorize expenses and help you take measures to reduce them.

Cut financial expenditures.

Businesses lose a lot of money on things like high fees on business credit cards, late loan payments, or crazy insurance policies. By taking a closer look at your financial accounts and automating as many financial processes as possible, you can optimize business costs by far.

First, implement an online payment system and set up alerts to avoid overdue bills. Then, ask your credit card processing company for a lower rate, especially if you’ve been with them for a long time. Visit your bank and ask what options they could offer business owners like you. It wouldn’t cut expenses with a wave of a wand, but it’s a smart step to your financial health in the long term.

Restructure your loans.

f you have taken a loan and its installments are causing a burden on your monthly cash flow, just talk to your bank. Most banks can give you an option to either pause it for a specific period or help you restructure to increase the tenure and reduce the installment. Alternately, you can talk to other banks for lower interest rates and improve your cash flow.


Hire smart, inexperienced people.

Experience is important but it’s not everything, and it comes at a cost. More and more technology companies now hire fresh college grads and then train them for a month or two. It turns out to be a lot more cost-effective than hiring an experienced person. For critical work scenarios, you have no option but to go for experienced people but in most cases, the strategy of training freshers works.

You will not only gain a monetary advantage by providing an entry-level salary but you will also benefit by having employees who are enthusiastic, up-to-date on the latest technology, nimble, and eager to learn.

Hire freelancers.

A remote worker and a freelancer are far from the same. While the former is your full-time employee who’s just absent from the office, the latter has no employment obligations at all. Freelancers work according to their schedule, rates, and fees.

Think about whether you do need full-time designers, content writers, accountants, or other specialists. Working with freelancers saves your costs on employee vacations, training, sick leaves, insurance, end of service, and more. As a rule, freelancers take less money for their services than in-house specialists, so you’ll save some costs here too.

Get interns.

Extending the above cost-saving idea, hiring interns could also bring in cost savings in terms of salaries. Normally, interns work for 2 to 6 months depending on their academic requirements. There are a lot of non-critical activities that can be delegated to interns. They are enthusiastic and full of energy. Interns are good for activities like social media promotion, back-office administration, market surveys, or other short-term tasks.

Reward your profit-makers.

It may sound a little contradicting, but spending to save does make sense in some cases. I would suggest taking the proactive approach of rewarding profitable behavior from both your employees and your customers. What does that look like? You can start by making small gestures, like an occasional free lunch or a treat, to boost employee morale and keep the work environment positive.

It could also mean offering bonuses to employees who meet certain cost-saving targets set for that year and offering deeper discounts or value-added packages to your most loyal customers. If you’re spending a little money on the people who do the best work for you or purchase the most product from you, you’re simply investing in a relationship that will ultimately bring more profit to your business.


Go paperless.

These costs seem minimal at first, but they can add up to actual business expenses. Paper, ink, supplies — why not replace them with digital invoices, bill payment systems, and professional document creators?

By going paperless (unless printing is inevitable), you can save up to 60% of office supply. Also, it’s eco-friendly: save your office space from tons of printed sheets, which anyway go to shredders sooner or later.

Relocate to a more affordable area.

Think if you do need a huge physical location for your business. Analyze how much space you rent now: Is it worth paying for it? If possible, downsize your office or shop, consider open-plan workplaces, or just move to a more affordable area. Such changes will reduce your business costs by far.

Also, think of shared workplaces if you have some unused space in the office. Turn it into co-working or consider subleasing it. It will save some expenses and (why not?) may lead to new partnerships with companies that’ll share the space with you.

Think of a virtual office.

If acceptable, convert your business to a home-based one, with remote employees and freelancers (both mentioned above) in the staff. It will allow you to cut corners on office rent. Consider co-working spaces or conference halls for business meetings if needed.

Or, think of a virtual office: when your whole range of business functions are available through the internet. Not only do they save your time and provide low technology costs, but prevent the need for an office lease and other utility payments.


Consider free yet effective marketing strategies.

Yes, your business needs a stellar marketing strategy to generate profit. But if your focus is the paid ads and media buying only, get ready to say goodbye to your business costs.

Optimize your strategy with low-cost but high-results marketing. Consider free social media promotion, ask customers to write reviews, get free backlinks from your network, etc. The methods are many, and you’ll see a relatively quick response with minimal business costs. Cheaper alternatives include:

  • In-house SEO and marketing instead of paying someone else;
  • Building awareness and trust through reviews and recommendations;
  • Referral programs;
  • Social media strategies on the right platforms (those where your target audience is present): Facebook, Instagram, Twitter, Snapchat;
  • Networking with influencers in your niche. It’s your chance to turn them into brand advocates, so they’d help you build loyalty.

There’s no need to eliminate all the paid ads. But as you can see, some cheaper alternatives are worth trying too.

Cut traditional advertising in favor of low-cost alternatives.

Traditional advertising methods like buying print ads can get very expensive these days. Explore new tools like Google AdWords & Facebook Ads to advertise your product to the targeted audience. You can target users from a specific city, age group, and demographics and get good returns on your marketing investment.

Create partnerships for marketing.

Explore opportunities to partner with non-competing companies to promote your product and save on marketing expenses. It’s important to make sure that the partnership is mutually beneficial for both parties otherwise it will not yield the desired results.

Sell online.

By now, you probably know that online commerce is a big deal. Earlier, it used to take a lot to build your own eCommerce store. But nowadays, it’s easy to set up seller accounts on eCommerce marketplaces such as sites like Amazon, which even offer their warehouse to store your inventory. This can save huge costs in marketing and inventory maintenance. In fact, this is something which you can let you operate from a small room.

Consider bartering and co-marketing.

Bartering is an exchange of goods and services. Let’s say you have a small writing business where you’re a great essay creator but have no time or skills to market your services. Why not offer your writing services to others who’d organize for you a marketing campaign in return?

With such a bartering arrangement, you can reduce business costs too. Apart from the financial benefits, it’s an excellent chance to grow business connections and find new customers or partners.

There are many methods to approach co-marketing: exchange advertising spaces with fellow business owners, share mailing lists, publish content on each other’s blogs when relevant, social media mentions, etc. It will save time and money for ads yet boost your rankings, attracting new potential customers.


Use modern technology for business processes.

You should use modern technology whenever you can to save money and take your business forward. From virtual meetings and online payment services to free tools like Trello, Google Docs, or Basecamp for data organization and employee collaboration, there are many ways you can save business costs with tech.

Tools and gadgets also help employees to focus on work, which saves time and money on logistics. Use chat and internet calling apps to minimize unnecessary phone calls and face-to-face meetings.

Also, conduct your technology audit. How many paid apps does your business currently have? Are you sure you use all of them? If you haven’t been using an app for the last 90 days, it’s time to cancel the subscription and stop spending money on what you don’t need. Make it a habit to review all the paid tech every two months. More than that, try their free versions before paying for the premium one: Make sure it’s an app you truly need for business.

Lookup in the cloud.

You can save a lot of time and resources by adopting cloud computing. Employees can work remotely and use online collaboration tools to get the work done. For example, you can use Dropbox to share files, Xero for managing finances online, and Zoom or Skype to have virtual meetings. Just find the opportunities to mobilize your work using cloud apps. This will definitely result in cost savings in a long run.

Use open-source software.

You can save a substantial amount of money if you start using open-source software. When ordering new Laptops for the team, you can go for the ones without Windows OS. Those are cheaper and can run open-source OS such as Ubuntu. Similarly, you can get an open-source office suite like OfficeLibre instead of Microsoft Office and save on licensing costs.


With little imagination and experience, you can find out the way to cut costs and save money in your business. It always helps to talk to fellow entrepreneurs and understand the best ways to save money from their experiences.