{"id":65291,"date":"2022-04-21T18:37:18","date_gmt":"2022-04-21T22:37:18","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=65291"},"modified":"2022-05-01T21:20:05","modified_gmt":"2022-05-02T01:20:05","slug":"cost-cutting-in-business","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/cost-cutting-in-business\/","title":{"rendered":"Cost-Cutting in Business: 4 Failproof Methods"},"content":{"rendered":"\n

Are you looking to cut down on your business expenses? How do you determine what your business needs and what can be cut?<\/p>\n\n\n\n

When it comes to cost-cutting in business, it should never be done at the expense of your crucial functions. Before you cut costs, identify resources you couldn’t do without and cut only what you don’t need. <\/p>\n\n\n\n

Here’s how to lower your business expenses.<\/p>\n\n\n\n\n\n\n\n

Cutting Business Expenses\u00a0<\/strong><\/h2>\n\n\n\n

As you increase your profit percentage, you\u2019ll need more money available for your profit allocation. However, increasing your income is not <\/em>how you should get this additional money.\u00a0<\/p>\n\n\n\n

In business, cost-cutting is one of the simplest and fastest ways to inject more money for profit allocation. Michalowicz recommends four methods for cutting your expenses, all of which center around determining what your business needs and getting rid of what it doesn\u2019t.\u00a0<\/p>\n\n\n\n

Method #1: <\/strong>Keep, Improve, or Remove<\/strong><\/h3>\n\n\n\n

Michalowicz first suggests finding the costs you don\u2019t need, and then cutting them. He recommends you cut 10 percent of your expenses immediately after starting the Profit First method<\/a><\/strong>, and even more than that as you continue on. Starting with a 10 percent cut is a good way to ensure that you\u2019re consistently able to spend less of your income on expenses each quarter. This is because cutting an expense doesn\u2019t immediately get you all of that money back, but instead means that less of the income you earn going forward will need to go into expenses and can instead be reallocated. <\/p>\n\n\n\n

(Shortform note: Throughout this chapter, Michalowicz is working on the assumption that your business has expenses that are far too high. However, if that doesn\u2019t describe your business, then you might not need to make the sweeping cuts that Michalowicz recommends here. That being said, these methods still might allow you to find some places where you can save money.)<\/p>\n\n\n\n

When deciding where to cut costs, the key question you need to ask yourself is: Which expenses are necessary for keeping my business running and making my clients happy<\/a>?<\/strong> Michalowicz creates five steps for applying this standard to your business\u2019s expenses:<\/p>\n\n\n\n

  1. Put together a list of all your business expenses from the last 12 months, using your income statements, current accounts payable report, credit card statement, loan statements, any other debt statements, and payments from your business bank accounts.<\/li>
  2. Once you have the list, go through and label expenses necessary for running your business and making customers happy, \u201ckeep.\u201d Label any expense that is necessary but can be accomplished in a cheaper way, \u201cimprove.\u201d Finally, label expenses that aren\u2019t necessary to running your business or making customers happy, \u201cremove.\u201d<\/li>
  3. Once you\u2019ve labeled all of your expenses in this way, it\u2019s time to start cutting. Start by making a plan to cut every single expense you labeled \u201cremove.\u201d <\/li>
  4. Then, go through each cost labeled \u201cimprove\u201d and figure out how you can reduce it. This will be an extensive process that involves finding cheaper alternatives, negotiating with vendors, and looking for new ways to be frugal. All of these require you to do your research and be informed.<\/strong> Go into your expense negotiations with an idea of standard prices and potential cheaper alternatives, and you\u2019ll be more likely to end up with a better deal. <\/li>
  5. Finally, once you\u2019ve done all of this, you can take another look at your \u201ckeep\u201d expenses. Consider ways you could potentially reduce these\u2014even if you can\u2019t, you should still be critical of all expenses so you don\u2019t get complacent in letting your costs build up. <\/li><\/ol>\n\n\n\n
    How Best to \u201cTidy Up\u201d Your Expenses<\/strong>

    If you\u2019re having trouble identifying unnecessary expenses, try using the practical techniques Marie Kondo recommends for determining the things you do or do not need. Kondo offers two guidelines in The Life Changing Magic of Tidying Up<\/em><\/a> which can be particularly useful to identify cuttable costs. 

    Discard in one go: <\/strong>When you\u2019re going through the process of getting rid of what you don\u2019t need, Kondo recommends that you     get together everything you have and work through it all in one go.<\/a> This doesn\u2019t necessarily mean you have to do it all in one sitting, but you should work to declutter as much as you can until it\u2019s done, rather than only doing a little at a time. When you declutter in one go like this, you keep up your momentum and don\u2019t drag the process out over a long period of time. To use this with your business, use all the time you have available to assemble your list of expenses and keep, improve, or remove them until you\u2019ve reached your current goal. 

    Sort categorically: <\/strong>Kondo recommends that     you sort <\/a>what you\u2019re decluttering by category, so you\u2019ll have an easier time noticing what you have too much of. In your business, organizing your expenses by category will help you notice which are redundant and can be cut.For example, when you sort your costs into categories you might realize how many online subscriptions you\u2019re paying for, and then can cut those costs.  <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

    Method #2: <\/strong>Manage Labor Costs<\/strong><\/h3>\n\n\n\n

    Labor costs<\/a> are a kind of expense, <\/strong>and Michalowicz\u2019s second expense-cutting method involves managing them just like your other expenses\u2014in other words, thinking about your employees within the \u201ckeep, improve, or remove\u201d framework. (Shortform note: When considering which employees to \u201cremove,\u201d Michalowicz emphasizes that you act decisively, fire who you need to, and then ensure your other employees that their jobs are secure. This allows you to keep morale and satisfaction up amongst your employees, which research suggests directly contributes to customer satisfaction<\/a>.)<\/p>\n\n\n\n

    In order to determine each employee\u2019s categorization, Michalowicz recommends examining two points: how efficient your employees are and how many employees you need<\/em>.<\/p>\n\n\n\n

    Ensure Your Employees Are Efficient<\/strong><\/h4>\n\n\n\n

    Often, cutting labor costs means getting better work done for your money rather than just firing employees\u2014\u201cimproving\u201d the expense instead of \u201cremoving\u201d it. When managing your labor costs, Michalowciz suggests you first make sure that you and your employees are working effectively. He offers three different guidelines for this.<\/p>\n\n\n\n

    1) Consider Your Own Workload<\/h5>\n\n\n\n

    Michalowicz recommends that as you manage your labor costs, consider the kind of work you\u2019re doing\u2014are you able to take on more work, instead of outsourcing it? Keep in mind that you should be doing the work<\/a> of an employee when your business is small, and will slowly transition towards doing big picture organizational work as it grows. Don\u2019t delegate all of your daily operational work to your employees early on\u2014if you do, you\u2019ll be paying someone else to do work that you could still be doing for your existing salary. <\/p>\n\n\n\n

    2) Systematize Your Labor<\/h5>\n\n\n\n

    When managing the labor your employees do, Michalowicz advises that you make sure the way you want your business to run is clear to your employees. <\/strong>As an entrepreneur, you have a good idea of how best to do the daily work your business requires. Write it down, creating instructions or guidelines to help your employees do their work the way you want them to. <\/strong><\/p>\n\n\n\n

    3) Determine Necessary Roles<\/h5>\n\n\n\n

    Finally, go through the roles and responsibilities of each of your employees and determine which are not necessary for running your business or keeping customers happy. <\/strong>If an employee\u2019s role doesn\u2019t do either of those things, then Michalowicz says they need to be reassigned or fired. <\/p>\n\n\n\n

    Determine How Many Employees You Should Have<\/strong><\/h4>\n\n\n\n

    In addition to methods of ensuring your labor is efficient, Michalowicz recommends you save on labor costs by using your adjusted revenue as a guideline to determine the number of full-time employees you should have. By basing your employee count on your adjusted revenue, you\u2019ll ensure you don’t spend too much money on payroll, while still having enough employees to complete all the work your business needs. <\/p>\n\n\n\n

    Michalowic advises that your business should generate 150k to 250k revenue for each full-time employee you have. <\/strong>This number also varies depending on how much you pay your employees and how much revenue a single employee generates\u2014a business in an industry like tech which needs highly skilled laborers will generally have higher labor costs compared to its adjusted revenue, for example. <\/p>\n\n\n\n

    Method #3:<\/strong> Reframe Your Expenses<\/strong><\/h3>\n\n\n\n

    Michalowicz recommends that you reframe the way you think about your monthly expenses\u2014as an individual piece of your business\u2019s finances that will change over time, rather than as a static amount that must come before everything else. This will make it easier to recognize and accept which expenses need to be cut.<\/p>\n\n\n\n

    To reframe your expenses, he advises that when determining how much money you need to keep your business running, don\u2019t just calculate your monthly expenses. Instead, calculate the income you\u2019ll need each month to pay yourself<\/a> a consistent salary, keep your profits up, and <\/em>pay expenses. <\/strong>This way you still know how much money you need to keep your business running, but won\u2019t put expenses as your first priority. <\/p>\n\n\n\n

    Don\u2019t Forget About Cash Flow<\/strong>

    Michalowicz\u2019s suggestion to frame expenses in terms of income needed could potentially be less effective for ensuring you can pay your bills each month, depending on your cash flow. Remember that there\u2019s often a lag between earning income and having that income as cash on hand<\/a>.

    For example, you might be receiving cash on delivery, or be waiting for your client\u2019s payment to go through. 

    By framing your expenses as the amount of cash on hand you\u2019ll need each month to pay the bills, you\u2019ll be planning around this lag. However, if you\u2019re using Michalowicz\u2019s recommendation and only thinking about income needed each month, then you can end up in a situation where you\u2019ve technically made enough income to pay your bills but don\u2019t yet have that income available to you as cash on hand.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

    When you do your accounting this way, you can also check on your business\u2019s financial health just by checking your salary deposits into your personal account.<\/strong> This works with an existing habit, as just about everyone checks their personal bank account balance regularly. Here\u2019s how to recognize how much income you need by checking your personal bank account: <\/p>\n\n\n\n

    1. Take your monthly personal income needed to keep a consistent salary and divide it in half. This represents the habit of allocating your income twice a month. <\/li>
    2. Divide that number by your salary allocation percentage. <\/strong>The result is the income your business needs to generate every two weeks to meet your personal financial needs.  <\/strong><\/li>
    3. Multiply that number by 24. <\/strong>This is the income your business needs to generate each year. <\/li>
    4. Compare your salary deposits to these numbers. <\/strong>If they are consistently lower than your required amount, then you know your business\u2019s income is down. If its balance is higher than the required amount, then you know your business\u2019s income is up.<\/li><\/ol>\n\n\n\n
      Fully Gauging Financial Health<\/strong>

      While Michalowicz suggests that this process will allow you to gauge your business\u2019s financial health, many financial experts would argue that it can\u2019t fully do so. Determining your income via your personal bank account will help you understand how much money is coming into your business, but it won\u2019t help recognize where that money is\u2014or needs to be\u2014going. To get a full picture of your business\u2019s financial health, experts recommend consulting your financial documents<\/a>, with the help of a bookkeeper or accountant if necessary. These documents will help you understand things that a bank balance can\u2019t, like how quickly you turn over your inventory or how much money you need to pay interest on your business\u2019s debts.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

      Method #4: <\/strong>Pay Off Debt<\/strong><\/h3>\n\n\n\n

      The last method of expense cutting Michalowicz outlines is using the Profit First method to eliminate interest from business debts. (Shortform note: Most of Michalowicz\u2019s cost-cutting methods already assume that your business is in debt, and that\u2019s a fair assumption to make\u2014one recent study shows that 79 percent of all US small and medium companies are in debt<\/a>, and that 58 percent of all US small and medium companies are over $50,000 in debt.)<\/p>\n\n\n\n

      Be Ruthless in Cutting Expenses<\/strong><\/h4>\n\n\n\n

      Your first priority when paying off debt is to find a way to make your expenses less than your current adjusted revenue. <\/strong>You can\u2019t compromise on this, because if you do you\u2019ll just continue to increase your debt. Reduce expenses using the \u201ckeep, improve, remove\u201d method we explored at the beginning of this chapter, and be particularly vigilant in checking and rechecking them for ways you can save money. Continue to cut expenses<\/a> until your expense allocation percentage is 10 percent below the typical percentage for a company of your business\u2019s size. <\/strong>This extra amount cut is a safety net, just in case you need to take back a few expenses to keep things running. <\/p>\n\n\n\n

      Spend Critically<\/strong><\/h4>\n\n\n\n

      While in debt, cancel any and all automatic payments. <\/strong>You need to know exactly how much you are spending when and to be critical of every single expense you make\u2014every expense paid will be a conscious decision.<\/strong> Cancel all automatic credit card charges (you can do this by getting a new credit card with a new number from your bank), stop all automatic withdrawals from your accounts, and pay with checks instead. <\/p>\n\n\n\n

      (Shortform note: While Michalowicz advises you to think about each expense you make, you might be wondering how to do so effectively. Dan Ariely recommends in  Predictably Irrational<\/em><\/a> <\/em>that you pause before buying something and ask yourself several questions<\/a>. He advises you to ask yourself how your preference for this purchase started, if the purchase is worth the time and money you spend on it, and if there\u2019s a better way you can spend your money. Answering these questions allows you to rationally think about your behavior and recognize if your purchase is due to a habit or due to what you genuinely need.)<\/p>\n\n\n\n

      Paying Down Your Debts<\/strong><\/h4>\n\n\n\n

      Once you\u2019ve applied the first two methods to make sure you aren\u2019t taking on any more debt, then you can start paying off your existing debts. <\/strong>Michalowicz outlines two guidelines you should follow while doing so. <\/p>\n\n\n\n

      Alter Profit Distribution<\/h5>\n\n\n\n

      When you take out half of the money in your profit savings account each quarter for your personal use, 99 percent of that money should go towards paying your debts. <\/strong>Keep one percent for yourself so you can still feel rewarded for your success. Doing this keeps you from spending your tax money or salary on debts and further incentivizes you to keep your business stable and profitable.<\/p>\n\n\n\n

      Build Your Confidence<\/h5>\n\n\n\n

      Pay your debts in order from smallest to largest<\/strong>, rather than by interest rate. Pay minimums for all other debts, and use what\u2019s left to pay down the smallest one. This builds confidence in your ability to pay debts and makes paying them all off seem achievable. <\/p>\n\n\n\n

      Like much of the Profit First method, this emphasizes how the average person thinks over what\u2019s the most logical. <\/strong>Paying your highest interest debts first makes more sense logically, but starting with your most daunting debts is far more likely to lead to you giving up. Instead, prove to yourself that paying back debt is possible and you\u2019ll do so more consistently. <\/p>\n","protected":false},"excerpt":{"rendered":"

      Are you looking to cut down on your business expenses? How do you determine what your business needs and what can be cut? When it comes to cost-cutting in business, it should never be done at the expense of your crucial functions. Before you cut costs, identify resources you couldn’t do without and cut only what you don’t need. Here’s how to lower your business expenses.<\/p>\n","protected":false},"author":8,"featured_media":60901,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[45,79,31],"tags":[610],"class_list":["post-65291","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-entrepreneurship","category-money","tag-profit-first","","tg-column-two"],"yoast_head":"\nCost-Cutting in Business: 4 Failproof Methods - Shortform Books<\/title>\n<meta name=\"description\" content=\"In order to turn a profit, you need to make sure your business isn't racking up unnecessary expenses. 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