Cost Reduction and Profits



How to Reduce Costs
Increasing profits by reducing costs has to be based on a plan, which has to be organised and adequate. A proper accounting system has to be in place for the information to be extracted that will help to monitor cost reduction.

Cost reduction is not simply slashing away at any expenses without a sound methodology. The business owner has to understand the nature of costs and how they relate to sales, stocks and profits.

Cost reduction does not necessarily mean the reduction of particular types of expenses because you can achieve greater profits through better use of the cost dollar. It can be done by increasing the average sale to the customer, or by effectively using promotion strategies, or by improving internal methods and procedures. There are many ways that costs can be controlled or heavily reduced in order for the business to be profitable.


Cut Costs to Increase Profits
In many businesses it is much easier for the owner to reduce costs rather than spend a lot of money trying to triple the business sales. A business owner can have control over costs, whereas sales are dependent on the customer and the market. In order to reduce costs consistently, the business owner needs to maintain the mindset at all times.

Here are some suggestions that can be implemented to reduce business costs.

General

  • Always compare prices.
  • Never pay cash – always try to negotiate.
  • Check catalogues because prices are generally best through mail order purchases.
  • If necessary, use the Internet for research to ensure that the cost you are considering is the best available.

Travel

  • Use your frequent flyer miles.
  • Join up with a travel club for discounts.
  • Try to arrange your travel so that accommodation and travel costs are put together into a single package.

Legal

  • Have a list of all the questions available for your lawyers so the time spent with them is reduced.
  • Check out the legal fees that could be involved before considering court action.
  • Use arbitration or mediation if that will result in a resolution and a saving in legal costs.

Various Utilities

  • Monitor energy usage. Switch off all unnecessary power and install auto off light switches.
  • Have the local power company conduct an energy audit and suggest ways that power costs can be saved.
  • Refrain from making toll calls and other unnecessary telephone expenditure.

Other

  • Check out office supplies and make sure that staff are not using material fraudulently.
  • Check out usage in all areas of the office to reduce wastage.
  • Make sure you apply for bulk discounts, if purchasing office supplies in large quantities.
  • Do not purchase any further warranties, which are not necessary for equipment.
  • Make sure you pay the right price. This means negotiating, rather than accepting the offer.
  • Analyse all expenses and cut items out that have increased, or reduce those that are above budget.
  • Do a break-even exercise to show what is needed to meet fixed costs.
  • Take action. Basically, do whatever is necessary to reduce expenses especially when there is no offsetting revenue coming in because of that cost.