New customers are the lifeblood of just about any small business.
But even if you’re a growing company you can still cause issues by overspending.
Spending too much can creep in over time. Even if you’re diligent about what you’re spending there are many ways for it to grow a little over time until there are major issues.
There is also the frustration of figuring out when spending is a good thing and when it’s not really necessary. It’s not always clear. It’s not always fun to figure out.
But here are some steps for taking a deeper look at your costs and figuring out what to cut and what to keep.
1. Audit All Costs
The first step is getting a handle on what you’re actually spending. If you’re diligent with your bookkeeping then this shouldn’t be a huge amount of time. Especially for a small business. But there will still be a good amount of time required. If you haven’t been good with the books in the past you’re in for more work. But that work will be worth it as you look to get a handle on things.
Start with the most recent, finished month. Go through every expense. You’ll likely find items that you brush off as one-time expenses. Things you can overlook for now or come up with some excuse for. But then you’ll go back to the previous month. Then the month before that.
Do the same thing for at least the last six months. You should begin to notice trends. What might have been a seemingly one-time purchase for $500 last month turns out to be a regular $500 purchase. Maybe not the same thing each month, but you’re finding a way to spend that each and every month on something.
Last month it might have been office supplies. The month before maybe it was something for the exterior of your office or store. The month before that maybe it was permit.
2. Operations
Once you have all your costs listed out for the last six months, begin looking at all the costs that go into your operations. The things you seemingly need in order to deliver your product or service.
Costs of goods sold is one term for this, but it’s a little vague. The operations, in this sense, are really anything you’re spending money on that isn’t for sales and marketing.
You can call it whatever. The point is that you want to identify all the things that go into your operation and start looking for low-cost or no-cost alternatives.
If you’re needing to cut costs then you’re overdue for this procedure. Many businesses implement this type of overview or audit regularly. Perhaps every year or every three years. They’re always looking for ways to be more efficient.
There might be new software that is cheaper and just as good or even better.
There might be a better supplier for office supplies or some raw material you’re using.
Also look at your processes. The operation of your business. The things you and your team are doing. You can usually find a few steps in a few processes that can be cut out. You might need to let someone go if their job is no longer needed, but a better way to think about it is that you can eliminate unnecessary steps in the operations and put that person on another task that contributes.
3. Sales & Marketing
Small businesses often struggle with sales and marketing. The different channels can be expensive. And it’s easy to get locked on one channel when it’s seemingly working pretty well. Start looking at all the ways you’re spending money on marketing and sales.
Identify the ones that are necessary to acquiring new customers. Make sure they are paying off. Look at what it’s costing versus what it’s bringing in. Sometimes with marketing you’ll need to use an educated guess and that’s okay.
Also look at what your experiments are. Successful companies are usually testing new ways to market and sell their products. They’re spending some money on many things, but not necessarily spending big on a test. They test on a small scale for awhile on lots of things. Then they review and if one looks like a winner they go all in.
With this process you should find things to cut back on or cut out entirely. And usually you might also find something that’s showing promise that you can spend more on, which is great because that’s money well spent.
4. On The Fence
If, after going through expenses, you’re not sure on a few things then try testing going without it for a month. Maybe it’s a marketing or sales effort. Cut it out for a month. See what happens. If you’re still not sure, try it for another 2-3 months.
The same with software. Take something away and see how it affects employees. You’ll often find that what you thought was important really wasn’t and your employees are able to adapt and find something better for cheaper.
You can do just about anything for a month or two and get by. It’s a great way to see what’s really important and what just seems important.
5. Cut Underperforming Products
Famously, Steve Jobs came back to Apple in the mid 1990s. One of the first things he did was go through all the products the company was selling at the time. He identified four target customers and forced the team to cut back on products so that it only offered one product for each customer.
It really shook up the company, but it also saved it and allowed it to succeed in the following two decades.
Ford did something similar when they cut out all car production other than the Mustang. They focused entirely on the truck and SUV market.
Sometimes you’ll have products that may have been good in the past, but as time goes by they become more expensive and less profitable. They weigh everything down and a simple cut can open up all kinds of opportunity.
6. Cost Plans Going Forward
One final step is to focus on a budget going forward. Most medium sized companies and large operate on a budget. They look at their history of spending and use that to determine what they should spend in the future. The best companies have incredible discipline. They even stick to the budget when there are really good opportunities for growth.
Southwest Airlines, one of the most successful companies in history, was famous for limiting their growth. But really they were limiting their spending. They made sure that they only took the best opportunities. This allowed them to avoid crippling debt and stay profitable in a very unstable industry.
Conclusion
Spending is one of the downfalls for many small businesses. The reality is that most companies can drastically cut back if they simply took a few days to go through how they’re spending money. Just having an understanding of where the money is going can really help turn things around. It’s easy to get into bad habits. It takes discipline and a humble attitude to make a change.