Businesses are like engines. To produce, your company consumes. And like a more efficient engine, your business can produce the same output while consuming — that is, spending — less.
It’s true that you may cut costs on overhead and some capital investments, but the most opportunity to save lies in operating costs. That’s because operating costs account for the vast majority of expenses. A company’s operating costs are the daily expenses required by the business: payroll, inventory, marketing, and the like.
Here are nine common ways small businesses overspend, cutting into their hard-earned revenue.
1. Old or outgrown technology
Using ineffective tools wastes time. Still, we often feel they’re our only choice. Spreadsheets are a great example of this waste. Seventy percent of companies still use Excel for the majority of their analytical work, but 48% say spreadsheets make it harder to manage and gain insights into their data.
Old hardware and programs also impact productivity, morale, and employee/employer relationships. A recent survey revealed that 50% of employees said outdated tech tools negatively affected their productivity, and 16% said the effect was major. The same study showed that 3 out of 10 respondents would even switch jobs.
Source: ZenBusiness “Making Do With Office Resource Issues”
One worker in this situation asked peers for help in an online forum. His question resonated — four years later, people were still chiming in wondering the same thing: What do you do when you’re not given the tools you need to do your job? The original poster came back to update the discussion. “If you find yourself in this situation,” he writes, “Proceed with caution.”
2. Inefficient processes (“bottlenecks”)
What if it’s not a slow machine holding up your team but slow processes?
Knowledge workers admit to wasting an average of 5.3 hours per week waiting for colleagues to assist or share institutional information with them. Sometimes, they spend those hours recreating the knowledge themselves. In fact, between 20% and 30% of business’s revenue is lost to these kinds of inefficient processes.
Curious just how much slow and tangled processes affect you? Jigsaw24, a UK-based B2B software solutions provider, offers a handy calculator to compute how much inefficiencies cost your own operation:
The good news is that it’s easier than ever to find and remediate bottlenecks. Rolls-Royce automated their financial data collection from underlying databases, for example. The move reduced their monthly accounting close time from four days to a few seconds.
Sound nice? With Neat, you can do the same. Automate your most frequent and tedious yet necessary bookkeeping tasks by downloading the Neat app and letting it do the work instantly. In a few seconds, you can capture transactions, pair them with their matching receipts or other documents, and check them against your bank’s records. A free trial lets you try this instantaneous automation at no cost, so give it a go today, and recoup the wasted costs of inefficient processes, which are now a thing of the past.
Source: Jigsaw24 Cost Inefficiency Calculator
Most employers tackle absenteeism as a sunk cost. After all, if there’s an empty work station, you can see you’re losing money. But the cost of presenteeism is 10 times higher than that of absenteeism.
What is presenteeism? HBR experts define it well: “At Work — But Out of It.” Presenteeism is when employees (or leaders) come to work suffering silently with a draining condition — physical, mental, emotional, or otherwise — that saps a portion of their capacity and thus their productivity.
Hearing that presenteeism costs businesses 10 times what absenteeism costs prompts many business leaders to act. Thankfully, the tools to obtain these statistics are available to business owners like you, so you can assess your own presenteeism costs.
There’s something you can do about this cost now: Tell your team it’s OK not to be OK. The lingering stigma of mental health keeps presenteeism costs high because employees don’t want to admit their true cause of diminished productivity.
Dr. David Batman, chief medical officer of the Global Corporate Challenge, says the conditions causing presenteeism often affect sleep, so workers are also dealing with fatigue, difficulty concentrating, and decreased memory. But once they’re free to share (without fear), you can support them more specifically.
4. Outsourcing instead of multitalenting
Multitalenting — not to be confused with multitasking — is the practice of training employees in multiple roles instead of staying in their own lane of skills and responsibility. It is still sometimes called cross-training.
Employees benefit from multitalenting because it helps them expand their horizons.
“Working on something other than your regular tasks exposes you to a new set of co-workers, managers and customers,” writes Jacksonville-based HR expert Jennifer Arnold. “This broadens your network and helps build your reputation within the company and the industry.”
Arnold goes on to say that it also increases job satisfaction and security and leads to more fulfilled professional relationships.
Businesses benefit, too, by saving the investment of talent search. Integrated Packaging Corporation credits multitalenting for its ability to place 80% of its managers and leaders from internal promotions. Cross-training also helps you cut the expensive onboarding process. And if you realize the increased job satisfaction mentioned earlier, then you’ll also save money from decreased turnover.
“In the shop, many of our coworkers learn how to become potters or take on other roles so their role in the company can grow,” writes the team at Sunset Hill Stoneware. “A lot of these artisans have worked here for years. Members of our customer care team are also trained for sales, which keeps our business thriving. We offer cross-training to any employee that wants it because it makes all of our team members more valuable.”
So start creating a multitalenting program today. A simple plan is all you need to get started cutting this common source of waste.
5. Marketing without clarity
Just one generation ago, the best way to get noticed was through TV media placements, radio spots, billboards, and subway ads. Marketers paid for attention even if that attention was unqualified. By contrast, today’s targeting tools allow precise, low-cost marketing that’s not just “nice-to-have” — it’s a waste not to use them.
Today’s digital options allow targeting, which is the segmentation of groups within groups. That means you can advertise to people who, for example, have shown interest in your product or service before. Or you can advertise to folks who have engaged with your competitor or who live nearby.
Cutting this cost is simple. Conduct a simple media audit, and spend some time researching what others in your industry are doing successfully (as well as what has failed). Then, allocate 1% of your revenue to test each channel with varying messages and creative.
Repeat what works, and continue trying new untapped platforms until you gain enough insights to stick with one or two. Experts at Accenture say these simple steps can return up to 10% on initial investments.
6. Direction changes that affect operating costs
A study published in Frontiers in Psychology found that a capricious leadership style is associated with low organizational performance. In fact, leader carelessness is one of the “Three Nightmare Traits,” described by psychologists as impulsive. It’s characterized by “reactive management, planning problems, errors, low performance, [and] dissatisfied clients,” which explains the diminished performance.
In practice, this could look as simple as the manager who’s known for casually canceling meetings — and on a regular basis. On a larger scale, it manifests when leaders abandon strategies or waffle on big decisions, costing their businesses precious time, credibility, and yes, money.
To stop this wastage early on, leaders must learn to be agile and flexible without sacrificing their steadfastness and commitment to strategy. To do that, Bain & Company consultants recommend establishing a destination and sticking to it. However, recognize there may be many ways to get to that destination.
Also, remember you’re not alone. A Forbes roundup highlights 17 business leaders who also tend to make impulsive leadership moves (plus, their advice on avoiding this temptation).
7. High-level mistakes (“blunders”)
In business accounting, little mistakes don’t exist. A single typo muddies measurements, throws off totals, and skews forecasts.
“There were too many zeros added to the employee’s accrued severance,” explained an Eastman Kodak representative after adding $9 million to the company’s losses. The clarification came at the worst possible time for the company, adding to its continued market decline.
Thankfully, this is another area where automated bookkeeping can help stop the financial bleeding. While the industry standard is 80% accuracy, Neat’s receipt data extraction is over 99% accurate. Plus, Neat Complete plans all come with an extra layer of human verification just to be sure your records are reliable.
8. Unnecessary in-person, onsite work
In 2020, all nonessential workers had to furlough or transition to remote work. Today, 35% of those who experienced the “ten second commute” for the first time prefer not to return to the office, and not because of COVID-19 concerns. Not that they think they’ll need to anytime soon: only 28% of those forced to work from home in 2020 expect to go back to on-site work by the end of 2020.
But it’s not at all bad news. Working from home has been shown to increase work performance and productivity by 13%. And increased productivity boosts output without a surge in costs.
The key to cutting costs is “unnecessary.” Essential on-site, mission-critical roles must of course remain analog. But any jobs that can be remote can likely help you cut your operating costs.
9. Overhiring and talent mismanagement (“bloat”)
Hiring the right people at the wrong time (or the wrong people, ever) is among the top reasons companies go out of business. Another biggie? Mismanaging the people on your team. Let’s look at both.
How to avoid overhiring
Yong Kim, Wonolo’s cofounder and CEO, describes how his haphazard hiring nearly cost him his business. “Given the speed of startup life and the constant scramble to get things done before the money runs out, we looked at hiring as a way to check a box rather than a way to move us forward strategically,” he explains in Entrepreneur. “It wasn’t until the money was almost out that we realized where we went wrong in the hiring process.”
Your accountant can help determine when you’re ready to hire, and how. Without the help of a qualified accountant, you’re at risk of running into cash flow problems — where you are making money “on paper” but can’t make ends meet come payroll time.
How to prevent talent mismanagement
At its core, managing people is all about your investment in them as developing professionals, in exchange for their dedicated skills and talent toward your business’s goals. In practice, though, it’s a little more complicated. And any disparity between the ideal and the real will cost you.
To rein in this waste, start with yourself. Talk to your accountant to determine how much money you should be taking home. Avoid paying yourself (as the business owner) too much, and especially avoid paying yourself too little.
Next, make sure you’re supporting your people so they can give their best. Earlier, we discussed modern tech tools and the wellness reinforcements employees need. But teammates also need clear direction with accountability bumpers, as well.
“Employees who would never even think of stealing work tools, or who would be aghast at the thought of taking a $20 bill out of a cash drawer, think nothing of routinely ‘carrying off’ multiples of those amounts in the way they mismanage their time,” explains Diane C.O. Gilson, a CPA, a CIA, and president of Info Plus (+) Accounting.
Try a mobile app like Connecteam, which is perfect for “deskless” teams, such as plumbers, handyman-services providers, cleaners, hospitality workers, construction crews, and lawn-care professionals.
Rein in Waste for an Easier Win
The reason most small businesses prioritize growth over savings is that new sales come with an adrenaline rush and a sense of achievement that cost-cutting activities don’t usually deliver. The business owner who sees this underlying cause can acknowledge it and “earn more” by plugging the outflow before returning to the excitement of growth efforts.
Some of the takeaways here will require weeks or months to implement. Others you can do in the next two minutes. Automating your bookkeeping is one of those easy wins. Sign up for a free trial of Neat to experience the freedom of saved time — and reroute that time to more cost-cutting activities.