Whether you are experiencing a momentary cash flow issue or want to improve your company’s profitability, cost-cutting is a common approach of business leaders. But not all cost-cutting ideas are as good for your bottom line as they may initially seem to be. Even the best ideas need to be thought through carefully, or you may end up with unintended effects that actually reduce your profitability. If you’re planning to cut costs, here are a few tips to help you make sure the end result is what you hoped for.
Cut costs, not corners.
The wrong way to cut costs is by cutting corners. Reducing the quality of your products or services will have a negative impact on your customer base, which will ultimately lead to a loss in revenue not an increase in profitability. Don’t sacrifice quality for profitability. Sacrificing quality to cut costs is never a good idea. There are better ways to do it.
Focus on ROI.
Make sure that the costs you cut are not for things that are providing a good return on investment (ROI). Many companies look at the highest cost items in their expense report, and that’s where they cut first, but those may be more important to your revenue growth than the lower cost items.
Use Systems and Processes to Manage Resources.
Whether you are trying to manage raw materials orders and inventory or your team, implementing good systems and processes is a great idea. Many smaller company leaders may think they are too small for an ERP system, but that may be the most effective way to ensure you are making the best decisions possible. An ERP system can provide you with better insights and data to use in making your decisions. Using better data goes a long way toward improving profitability.
Start by looking at utility costs, insurance and bank fees, and expand from there. Consolidate what you can to get the best deals. But make sure you are still properly covered. Don’t take on loans or unnecessary debt, and when you must take loan or open a line of credit negotiate for the best rates. Make sure you have a good (or excellent) business credit rating. If your credit rating is not good, take steps improve it. You may be paying a penalty rate for a bad rating.
Automate and Use Technology
Technology was developed to make our lives better and improve outcomes for our businesses. Automation is a great way to improve productivity and increase profit margins. But be smart about the technology you invest in. If you can’t use the power it provides, you will likely be overpaying for a product that is more sophisticated than you need.
These are just a few ideas for improving your profitability. If you’d like to discuss other ways to improve your company’s profitability, give me a call to discuss your needs.