According to the Small Business Credit Survey, 19% of small business owners are hard-pressed to find funds to keep the lights on.
While making more revenue would obviously be the ideal solution, reducing business costs is often necessary to ensure the survival of your small business. At Neat, we’ve had to reduce business costs many times over the years to better manage our cash.
To help you navigate your own cost reductions, we asked our CFO, Jim Conroy, who has firsthand experience with reducing Neat’s business costs over the past 10 years, for advice. Conroy shares his insights below on how he’s handled reducing Neat’s costs (while both downsizing and growing) and how your small business can approach this necessary but often overwhelming task.
Evaluate your business expenses regularly
According to the Harvard Business Review, “most departments can cut up to 10% of costs without changing their interactions with the rest of the organization.” But how do you know when to cut these costs?
Sometimes, cutting costs is a necessity because of an economic event (take handling cash setbacks from COVID-19). But overall, Conroy recommends being proactive and evaluating your business expenses long before they become a problem.
“At The Neat Company, we tend to update our actuals (aka our recorded revenue and spending) on a monthly basis and update our budgets/plans on a quarterly basis,” he says. “So at every quarterly cycle, we evaluate major areas of spend to ensure we are being efficient in the ways we go about spending (especially as we scale up).”
In short, avoid having to reduce costs all at once, and instead, evaluate costs during your business planning cycle (e.g., every quarter). You’ll save yourself headaches as your company grows by building a regular review of business expenses into your planning process early on.
At Neat, it was easy to miss inefficient spending when we were scaling up as a scanner company (e.g., spending $100K on our phone system) because cash wasn’t a problem. Now that we’re scaling up again as a software company, a regular review of our expenses means that we’re not making the same mistakes.
Cut costs with the future of the business in mind
The specific business costs that you should reduce depends on your business’ operations. After all, the expenses of a lawn care business are going to look different from those of a retail store. However, Conroy does suggest cutting expenses that will have the least impact on the future operations of the business.
Look at major costs that you may be able to reduce, such as your phone system or your business’s rent. Also, look at your employee costs. People can account for 70% of your company’s spending.
According to Conroy, there’s always a tendency to try and cut non-people costs before looking at eliminating jobs. But taking a sober look at the numbers and making a reasoned decision has to bypass emotions to make the best decision for the whole company’s future.
If you are in the unfortunate position of having to eliminate jobs, there are ways to do it right.
“I find it best to cut once as deep as the business can handle rather than a smaller cut in hopes that the business starts performing and further cuts aren’t needed,” Conroy says. “Then let everyone know the unfortunate decision that had to be made, why, and that no more cuts are expected to happen.”
This way, employees aren’t walking on eggshells, wondering if they’re going to lose their job next. As for the employees who have to be let go, do it as compassionately as possible with as much severance as the company can afford, and try to part on good terms. You may be able to hire these employees back in the future if the business turns around. For example, at Neat, we had to cut people when we were downsizing but then were able to hire them back when the business started growing again.
Avoid long-term vendor agreements
When purchasing a tool or service (e.g., an internet plan or eCommerce platform), small businesses have to decide whether to lock into a monthly vs. annual or one-year or three-year vendor contract term to save on the per-year costs. But long-term agreements don’t always equal cost savings, especially if you become strapped for cash in the future and need to remove the tool or service.
At Neat, our biggest cost-reduction challenge was trying to get out of lengthy vendor agreements for services that we weren’t even using.
Conroy says, “Committing to a longer-term agreement can be beneficial to the business to lock in lower rates for a longer period of time. But only commit if the services or tool is necessary to the product you are producing, or something that might be such a pain to switch over on a year-to-year basis or that it’s unlikely you would switch it out for a while anyway.”
If you’re still leaning toward purchasing a particular tool or service, sign up for a trial period to be certain you’ll use it for the anticipated contract period (e.g., one-to-three year contract).
Balance efficiency with sustainable cost cutting
There’s a delicate balance when trying to make cost cuts efficient and sustainable (aka good for your business over the long run). Some reductions can be efficient and sustainable, like removing software that you or your employees don’t ever use. Other cost reductions might be efficient but can’t and shouldn’t be sustainable.
When we were undergoing a digital transformation at Neat, we realized that we needed to cut our marketing budget and spend more on developing our software.
“We heavily cut marketing costs to focus resources on building more features faster,” says Conroy. “Based on our brand and organic footprint, the cut in marketing was remarkably efficient.”
Now that our product is developed (check out the new bookkeeping features coming your way!), we’re able to scale up our marketing activities again. Look at business activities within your own business and determine which ones need more investment. For example, maybe you have a great product but need to increase sales. Spend less on product development and more on building a sales department. Once your sales department is built, invest money again in product development and creating new features.
Or maybe you don’t want to cut out a business activity completely but would like to switch to cheaper alternatives for things like operational software. Conroy recommends doing a gap analysis to understand what is being saved and what features you’re losing by switching to a cheaper solution. A gap analysis makes sure that your business can operate without the cut features.
Reduce costs with care
Quickly chopping away certain costs might seem like the best solution if your business is struggling just to keep the lights on, but take it from an experienced CFO — approach cost reductions strategically. Your business — and your employees — will benefit from this approach in the long run.
Reducing costs is also difficult if you don’t know what you’re spending. With Neat, you can use our dashboard to always keep track of the cash you have going in and the cash going out. Check out our free trial here!