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Guide

Cost Reduction Strategies: Keep Your Overhead Low

It's critical to evaluate your company's expense & develop a cost reduction strategy to productively allocate resources. Learn this & more on Fresh Insights.

Managing company financials and developing cost reduction strategies enables management to productively allocate resources, identify future opportunities and predict potential downstream challenges. At the same time, it equips the management team with empirical evidence to develop specific business growth strategies and lower operational costs.
 

Evaluate the Company Expense Category

Necessary business expenses account for a large percentage of a company's costs, from employee salaries to insurance coverage. The expense category is often the most obvious place to find opportunities to reduce overhead.
 
Evaluate company expenses on a line item basis to monitor where spending and costs can be reduced.
 
Start with a complete assessment of current expenses. Review profit and loss statements for the last few quarters to identify trend lines that are costing the company additional operating capital.
 
Review the last several years' tax returns with the company accounting team to identify expenses that can be reduced or eliminated, or where a deduction might have been missed. Visit the IRS website for all the information required to identify qualified deductions in your company expense accounts.
 
Creating and adhering to a company budget should cover all line items across all departments, products and services.
 
Customers and clients also should be evaluated as part of your business' cost reduction strategies. Some clients may not deliver an acceptable return on the business' assets, and contracts may have to be renegotiated or even terminated as part of this goal.
 
Finally, review the obvious -- office rental expenses, equipment leasing costs, travel and entertainment, in-office and remote telephony, company vehicle costs, utilities, and all the other expenses required to deliver the highest-quality products or services to your clients.

 

Product or Service Delivery Expenses

Another area to evaluate is in the cost of manufactured goods or service delivery. Certainly these are necessary expenses; however, they also offer a company opportunities to lower operational overhead without having a negative impact on client care.
 
During an analysis of manufacturing costs or service delivery expenses, consider the flow of goods and information through the company.
 
A vendor that provides raw materials at a lower cost or on more beneficial terms can directly increase company margins and, in many cases, equip the business to fully pay for goods from sales proceeds.
 
The materials you use in manufacturing can be changed, along with product design and specifications, the manner of delivery of finished goods, and client and customer service. All of these should be evaluated regularly to identify increasing expenditures related to product or service delivery, and new opportunities to reduce overhead without having a negative impact on client or customer satisfaction.
 
The Small Business Administration offers good suggestions on lowering cost of goods and services while maintaining a satisfied, expanding customer base.
 

 

Business Geography Expenses

If your company maintains regional, national or international offices, an evaluation of the costs associated with maintaining these satellite outlets and offices also may afford opportunities for reductions in business expenses.
 
Research and perform a cost-benefit analysis to determine if each remote site is functioning at maximum efficiency, and delivering sufficient revenues to justify maintaining its location. A restaurant with several outlets may discover that one under-performing location is a good prospect to close down.
 
There also are expenses spread across the geography of your business that should be looked at. Travel expenses, improved business network security to protect sensitive information, remote site maintenance, rent or mortgage – all of these add up. If one or more of your satellite locations significantly under performs over several quarters, it may benefit the business to close that location and use those expenses in a more productive manner.
 
Break down the development of cost reduction strategies into three broad categories: routine operational expenses, product manufacture and service delivery expenses, and geographical expenses associated with maintaining numerous outlets across an expansive service area, or tracking service personnel throughout the day.
 
Routinely review the company profit and loss statements, item by item, to identify opportunities for reductions in business expenses, and you will be able to increase your return on investment, improve productivity and ultimately grow the bottom line.
 
Talk to a Cadence Small Business banker to learn how our treasury management solutions can help your business become more efficient and productive.

 

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.



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