How to Cut Costs in the Right Places and Do More With Less
Opinions expressed by Entrepreneur contributors are their own.
If you’re a small business owner right now, you’re probably feeling the tension in the market. There is immense pressure to grow, serve your clients, pay your team and still keep a healthy margin against the background of a turbulent economy. At the same time, you know you can’t just slash costs blindly, as cutting the wrong things can put you in an even more difficult position.
Done well, strategic cost-cutting can actually make your business leaner, more agile and more scalable — and it can give you increased peace of mind. Instead of running your business from a place of fear, reframe this time as a way to lean out your business and build a stronger foundation. You may be surprised at how you’ll run just as effectively with less.
Related: 5 Ways to Cut Costs in Your Business
Understanding your costs comes first
Studies show that a large portion of small business owners are not aware of their key expenses. Before cutting anything, it is critical to zoom out and get a handle on where your money is actually going.
Labor is commonly the largest expense for small businesses. If you don’t already have clear ROI data on your team’s time, now is the time to set it up. These ROI calculations can vary drastically depending on the role, so if you have KPIs set up, take this time to review those. If you don’t, I’d recommend working with a strategic finance specialist to set those up.
Regardless, looking at your revenue per FTE (full-time employee) is a good place to start. That KPI should be close to $500,000 per full-time employee. If you are coming in under that, start looking at where on your team you can redirect their time to be revenue-generating or reduce labor time and cost.
Other expenses that tend to be fairly easy to reduce include outside contractor expenses, unused subscriptions and travel expenses. It’s a wise practice to review these expenses, one by one, every single month.
This kind of detailed financial review can be intimidating and stressful, but it is absolutely critical to surviving a slowdown as a small business. By establishing this practice now, you’re also creating a strong habit of being financially smart inside your business.
Related: Don’t Let These 8 Common Expenses Stunt Your Growth and Drain Your Profits
Considering what and when to delegate
A common myth is that delegation always saves you time, but that doesn’t always play out. It can become costly if done wrong, and any delegation you’re currently doing is worth a second look.
There are a few things to consider when evaluating what you’re already delegating or if you’re considering newly delegating work.
First, delegation works best if you’ve already systematized what’s being handed off. If you systematize first, you are delegating something that will minimize the cost of delegated labor, so you’re maximizing your ROI. This can look like automation inside of your CRM or creating SOPs for your main practices.
Speaking of ROI, consider the ROI of anything you’re paying to delegate. As an example, if you’re outsourcing cold-calling your leads, consider the cost of each call based on the hourly rate you’re paying and the number of appointments generated. This gives you an estimate of the cost per appointment, which helps you understand the ROI of that investment. If you can invest the money elsewhere in your business with a better return, this is the time to shift that investment.
Related: 8 Unconventional Ways to Cut Costs in Your Business
Don’t cut where it counts
Most businesses will go wrong by cutting investments that actually support long-term growth, like marketing, client delivery support or team culture, when they start feeling the financial pinch.
It’s critical to examine the ROI of each cost instead of panic-cost cutting. If your assistant is saving you 10 hours a week and you’re using that time to close deals, that has its own return. If your operations manager is helping you retain key clients, that’s a return. Make your best estimate of what that return is to help guide you in making that comparison. For your assistant, count the value of the deals they helped you close. For your manager, consider how many key clients they’ve helped re-sign.
One effective way to avoid this is to reinvest more into client delivery for your existing clients rather than growth. By ensuring your client delivery is top-notch, you can shore up growth by creating fans who will then refer to you while better retaining your existing clients. This can give you a multi-faceted return on the same investment.
Despite the slowdown that many small businesses are feeling in real-time, the goal at this moment in time isn’t just to survive. Rather, it’s to build a business that’s effective and lean. Then, when the economy inevitably picks back up, you’ve built an efficient business to build on, and you’ve flexed the muscles of regularly monitoring your finances and making data-driven decisions about them.
Join top CEOs, founders and operators at the Level Up conference to unlock strategies for scaling your business, boosting revenue and building sustainable success.