How to Reduce Business Expenses: 5 Opportunities to Reduce Costs
As the coronavirus pandemic subsides and commercial activity resumes, pent-up demand and consumer savings are expected to continue propelling the economy — presenting midsize businesses with ample growth opportunities.
Companies may be able to fund that expansion, at least in part, by managing costs more efficiently. And better cost management may be particularly appealing at a time when many executives are reluctant to take risks.
Leaders from midsize companies entered 2021 with renewed optimism for modest growth prospects. However most had muted hopes and nearly half said they held a more cautious mindset than before the pandemic, according to the National Center for the Middle Market.
Here are five strategies to consider for business owners who want to tame expenses.
David Cameron, head of business banking at City National Bank, suggested that business owners examine how the major players in their industry handle operations and expenses.
"Sometimes it's difficult to compare yourself — a small to midsize company — to other small to midsize companies because you don't have access to their financial data on things like operating margins or line-item expenses," Cameron said.
"So it can be useful to compare yourself to the largest companies, to understand how the best in the business do it at a very high level," he said. "If I'm selling paint supplies, wouldn't it make sense for me to take a look at Home Depot or Sherwin Williams or any of these public companies that sell paint supplies?"
Even though they are larger, their business models are typically similar throughout their industry. And data from the best companies in the business allow a helpful window into details such as their margins and expense management, Cameron said.
Optimize Cash Flow Cycles
Examine your agreements with customers and vendors to see if you can collect accounts receivable more quickly and extend accounts payable, Cameron suggested.
"To fund your growth you're going to need capital in the form of cash," he said. That means focusing on cash flow cycles. If you can collect money from customers more quickly, you'll be able to better afford your purchases, Cameron noted.
It may be better, for example, to give a discount to a customer who's willing to pay in 15 days rather than 30. “That sometimes pays for itself," he said, "because now I don't have to go borrow from a bank for that money that I will need for 15 days."
Negotiating with vendors to extend payments can yield a similar result. “Look at working with your vendors and potentially doing more with a single vendor, so you'll get additional discounts and better terms," Cameron suggested.
You might offer to double the amount of goods your company purchases from a single vendor if they allow you to pay in 60 days rather than 30. And you could propose an even bigger purchase in exchange for a discount, Cameron said.
While consolidating vendor relationships may allow you to win extra discounts or extended terms, Cameron had one caveat: Banks sometimes perceive vendor or customer concentration as a risk, so keep that in mind when reworking those arrangements.
Reexamine Real Estate
Reconsidering your real estate needs post-pandemic may be another option for managing costs.
Some office-oriented businesses that switched to remote working arrangements during the pandemic have been reexamining their real estate priorities and choosing not to renew leases, Cameron said.
"It's very industry-specific," he said, noting that it's easier for professional services firms to drop office space than it is for manufacturers and distributors.
Besides reevaluating your real estate needs, you might look into negotiating better rents now, given changes in the commercial and retail office landscape.
Statista reports that U.S. office vacancy rates climbed to 16.4% on average in the first quarter of 2021, from 13% in Q1 2020, and that retail vacancies hit 20% in the second quarter of 2020.
In the third quarter of 2020, office vacancy rates in New York were 32% higher than a year earlier, while Chicago vacancies were 23% higher and Los Angeles vacancies 12% higher than the previous year, according to the McKinsey Global Institute.
The ability to negotiate terms may depend on location, however. Even as office vacancies increased over the past year, lease rates edged up 1.4% on average, with rents rising in the San Francisco, Washington, D.C., and New Jersey markets and falling in Chicago and Seattle as of March 2021, according to CommercialEdge.
Keeping Pandemic Adjustments
Companies across multiple industries switched gears to survive during the pandemic, developing new delivery methods, products and markets to adjust to a drastically altered lockdown environment. Some may find that it makes good financial sense to make temporary changes permanent.
The adoption of delivery services for every industry that sells a product is likely to continue, Cameron said. “It's not going to be at the same pace but I don't think it's going away, so it's still a complementary service," he said.
Restaurants that introduced outdoor dining, or even allowed customers to order drinks to go, also are likely to keep those options going, he predicted. “They're not going to do that as often as they did during the pandemic but it's not something that they're going to want to give up," Cameron said.
McKinsey predicts that remote work and virtual meetings are likely to persist after the pandemic, although less frequently.
Technological innovation can help companies cut costs if managers choose the right tools for their businesses, whether it's scheduling, order-processing or project-management software, cloud-based collaboration programs or time-tracking apps.
Automating business processes and easing communication between team members can save time and materials and help businesses operate more efficiently and productively.
“We should always be thinking about technology and digitization," Cameron said. "As we recommend with everything we do, look for technology enhancements to eliminate redundancies or streamline business processes."
Technology can also help businesses outsource activities, he noted.
Companies historically have controlled costs and alleviated uncertainty during recessions by implementing automation and redesigning work processes, according to McKinsey, which noted that two-thirds of senior executives in its July 2020 global survey reported they were increasing their investments in automation and artificial intelligence.
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