Manage and reduce your business costs
The profitability of your business is determined by your:
- money coming in (revenue)
- money going out (expenses).
To run a profitable business, you must focus on generating more revenue than what you pay in business expenses and costs. Learn how to improve your business's profitability by decreasing your expenses. Read about the different costs involved in running a business and tips to help you better manage and lower these expenses.
Manage your business costs
Review the following factors when you're looking to better manage your business costs.
Understand your costs
Have a clear understanding of what costs are required to run your business, and how and where they add value to your operations. This can help you create strategies to reduce your costs.
Review which costs are vital to the profitability of your business, and which ones you can reduce, by looking at your cost and profit drivers. Understanding which costs make up most of your expenses (e.g. rent and wages) and looking at ways to improve the efficiency of these expenses can lead to generating increased profits. Knowing your costs will also allow you to forecast more accurately and predict how they might vary in the future.
Ways to manage costs
Once you understand where your costs come from, you can identify ways to reduce or minimise those costs. Some expenses may be simple to cut back on, while others may be more challenging to revise. Consider if technology can help support some of your key activities such as marketing or online distribution opportunities. You could also investigate ways to minimise production costs or be able to negotiate with your key suppliers.
Managing your costs is not always about reducing them; it can also mean taking on additional costs if they add value to your business. For example:
- an online business that leases a shopfront in a busy shopping centre over the festive season may bring in higher revenue that outweighs the additional costs involved
- new technology can be a large upfront expense but can be a good investment to reduce ongoing staff costs, to streamline processes or to reduce the space required in your shopfront.
Schedule a regular management task to review your costs and cash flow to look for ways you can reduce, or better manage, your spending. Review your forecasts against your actual performance at the end of each month to ensure your business stays profitable.
- ways you can improve your financial knowledge and skills (and those of your team)
- talking to your accountant or finance professional for advice
- networking with other small businesses or business groups to find support
- benchmarking your costs against those of your competitors or your industry
- accessing ecoBiz, a free cost management resource available for small businesses and funded by the Queensland Government. Talk to an ecoBiz expert to develop a money saving plan for your energy, waste and utilities.
Reduce your business costs
Keep your business costs as low as possible to run a profitable business. Read about common categories of expenses for most small businesses, and tips to help you reduce your costs in this area.
Your salaries and other staff expenses will often be a major part of your total expenses. Make sure you're only hiring based on the work you need completed and have available. This includes making sure you have the right people in the right roles. Be careful not to significantly reduce costs for how you support your staff, such as training, as this may affect your profitability and productivity in the future.
Tips to reduce payroll costs
- Identify the types of employees your business needs, including what skills and experience they have, and assign tasks accordingly. This will improve overall efficiency and productivity across your business.
- Use salary guides as a reference for what you should pay your staff (e.g. salary range and rates). This information is provided by most major recruitment firms. Remember that an employee will often cost between 1.25 and 1.4 times their salary, when you consider superannuation and any additional benefits you offer them.
- Be aware of minimum wage and salary requirements.
- Recruit for your business's needs. If you have tasks that don't require a full time employee you could consider part-time or casual agreements, or hire a contractor or freelancer.
- Invest in regular training for your staff. This ensures they can operate productively and provide the latest skills and experience for you and your customers.
Your property costs will most likely be one of your biggest recurring expenses. Consider how you can make the most of your space, and that you’re using the right premises option for your business and budget.
Tips to reduce premises costs
- Keep your workspace small—you can always expand later if needed.
- Consider your location carefully. If you don't need to be right where your customers are, think about a location away from largely populated areas or central business districts. Property in these areas will be less expensive to lease.
- Sub-lease unused work space to other businesses.
The equipment you need will depend on your business type and sector/industry. For example, a manufacturing business is likely to need a large amount of expensive equipment, whereas a law firm may only need a basic office fit out. Essential business equipment will require an initial investment as part of your set up or development costs, but you may also need to factor in extra costs over time, such as maintenance, repairs, and replacements.
Tips for reducing equipment costs
- Identify equipment that can perform multiple functions. For example, in a retail store, a tablet could be used for point-of-sale transactions, stock control and invoicing.
- Consider buying second-hand equipment, or leasing equipment. Talk to your accountant or financial adviser to better understand any implications of renting or leasing versus buying equipment, such as depreciation (how much value an asset loses over its life expectancy).
- Make sure you budget for repairs and maintenance. Regular maintenance can reduce long-term costs of major repairs.
- Establish a maintenance schedule to ensure machinery is in good working order.
Insurance for your business is essential. It protects you from unforeseen issues that can cost you a lot of money.
Tips for reducing insurance costs
- Negotiate with your insurance providers to secure the best rate and ask for a discount.
- Review your coverage regularly to see if it still meets your needs—check the inclusions and exclusions of your policy to ensure that you are covered for everything you need.
- Always compare with multiple providers to get the best rates and coverage.
Learn more about business insurance.
Your inventory or stock needs careful management. Too much stock can go out of date or not sell. Too little stock can mean not having enough to sell when demand is high.
You may be able to access a loan to help you purchase stock (inventory financing), but you will need to meet minimum loan requirements such as how long you’ve been in business and have a record of good cash flow management. It may not be possible for a new business to meet these conditions.
You can benchmark against 2 key inventory measures:
- inventory turnover—the number of times inventory is sold per year (or relevant period)
- stock days—the average days inventory will be held in store.
Tips for reducing inventory costs
- Carefully structure your inventory costs. It takes time to become experienced in how best to manage your inventory (i.e. how to balance the amount of stock you order against likely customer demand).
- Factor in costs for storage and insurance.
- Discuss your industry averages with your financial adviser or accountant.
You will require essential services for your operations, such as water, energy, internet and telephone. These utility costs will depend on the size of your property and business operations, but they can easily take up a large portion of your ongoing costs.
Tips for reducing utility costs
- Develop processes for staff that specify how and when utilities should be used, for example, making sure all devices are turned off and unplugged at the end of the day.
- Install energy-efficient equipment.
- Occupy a smaller workspace to reduce your spending on electricity (e.g. for lighting and air-conditioning).
- Consider installing solar power to reduce electricity bills.
- Regularly review and renegotiate plans with your providers. Use comparison sites to better understand competitive pricing and service options.
- Utilise free government programs such as ecoBiz to explore your energy, water and waste consumption and to identify cost saving opportunities.
Tips for reducing professional adviser costs Research professionals before you commit to a contract with them. Consider whether their values and reputation align with your business and they have the services you are seeking. Ask other local business owners for advice and if they recommend the professionals they are using. Negotiate payment options that are suitable to your business. Some advisers require an hourly fee or a retainer. Make sure you do your homework before you start your negotiations and understand the going payment rates in your area and industry.
Marketing is an essential activity for many businesses to generate sales and improve customer and brand awareness. There are many different forms of marketing and advertising available, some more expensive than others, and with varying levels of return on investment. Focus on marketing strategies that will provide the highest return.
You may choose to engage professional marketing support who can provide a range of services from developing a marketing plan, to conducting market research and direct marketing services (e.g. social media and telemarketing).
Tips for reducing marketing and advertising costs
- Clearly define your target audience and the best methods to reach them to make sure you're using the right channels for your customers. Look at the media they consume and the advertising they most engage with. Just because a certain form of marketing is trending, it doesn't mean this will be the right strategy or fit for reaching your target market.
- Focus on marketing strategies that are most likely to give you a high return on your investment or those that work well for your industry.
- Research what others in your industry are doing and what works for your competitors.
Learn more about how to research your customers, market and competitors.
You may have to pay for licences, registrations, subscription, or membership costs. This can cover anything from association fees and maintaining your professional qualifications, to software subscriptions.
Membership of your industry association may give you access to additional business support, provide advocacy in challenging times or support you when building your networks. Assess the benefits against the costs and ensure that you are actively using your memberships and subscriptions.
You may be required to travel to jobs or entertain your clients. Ensure your team are aware of any budget requirements that you have when entertaining.
Read information on travel allowances from the Australian Taxation Office.
Tips for reducing travel, dining and entertainment costs
- Keep track of costs and reimburse employees for travel and other business expenses (this may include taking clients out for dinner or transport—ensure they understand your budget before incurring expenses).
- Keep total travel costs to a minimum. You may choose to set a maximum budget for travel or business expenses.
- Carefully consider your travel and vehicle expenses and establish policies for these costs. For example:
- decide if employees should use a company car or their own car while working
- use fuel cards to track spending
- minimise paid parking and toll usage
- fly economy class only unless the flight is a certain length—then offer business class
- book with the same airline to take advantage of rewards points.
Bob is the owner of Bob's Bakery, the only bakery in town. He has been operating for over 20 years with a well-established brand that everyone knows and loves. Bob's store is always busy and always making a profit, which meant he hasn't needed to spend any time keeping an eye on his finances. Recently, another bakery opened nearby in a better location than Bob's store. The new bakery has been positively received by the town. This has had a negative impact on Bob's finances.
- New competition has resulted in a loss of revenue for Bob's Bakery.
- Bob struggles to pay his flour and yeast suppliers, and his 2 employees.
- Bob decides to start managing his finances better. He starts by analysing his financial ratios.
- Bob benchmarks his bakery against his industry to identify where he is least competitive.
- Bob finds some of his ratios are significantly higher than his industry averages. He develops strategies to bring his expenses ratios in line with averages.
- To reduce his expenses, Bob sources flour from a different supplier which saves him $2,000 per month.
- Bob notices a big improvement in his financial performance since reducing his expenses. He can still pay his suppliers and employees while still making revenue off his regular customers.
Neil owns a small building company. He has an apprentice and 2 carpenters that work for him. Neil doesn't have time to manage stock levels at his warehouse where he keeps his tools and materials. Neil also regularly forgets to check the stock in the 2 work vehicles before travelling to job sites which has resulted in missing tools and materials. To avoid driving back to the warehouse, which is 10km outside of town, Neil visits the local supplier to buy the missing stock on the company card. His lack of stock management has negatively impacted his business.
- Neil incurs additional costs by buying higher-priced tools and materials from the local supplier every time he is missing stock. These are costs that weren't budgeted for and impact his revenue.
- Neil is left with excess tools and materials in his warehouse.
- Due to time spent at the local supplier buying these materials, Neil loses time on the job site which delays the completion schedule, which in turn impacts his other jobs that he hasn't started yet.
- Neil decides to improve the way he manages his inventory.
- He creates a tools and material checklist for the warehouse and for his work vehicles. He makes a new rule that the apprentice must check this list every morning before travelling to the job site.
- Neil boxes up and saves any duplicated stock (tools and materials) for when the old stock needs to be replaced.
- Neil's efficiency improves as he is not traveling to the local supplier for replacement stock and is instead focused on paid work. This means the works are completed on schedule and he can then start his next job on time.
- Neil's financial situation improves as he maintains his profit margins, improves competitiveness due to better profit margins and sees a significant profit turnaround.
Gigi is the owner of a landscaping business. She has 3 landscapers and 1 administration assistant who work for her. Gigi isn't a big technology user and her business has always used paper-based job cards. Unfortunately, the landscapers haven't been completing the job cards at the end of jobs. They also keep forgetting to hand the job cards into the office for the administration assistant to process.
- The administration assistant spends valuable time chasing up job cards, which comes at a cost.
- This also causes delays in sending invoices which triggers cash flow issues due to delayed payments.
- Gigi decides to make improvements to her systems by implementing digital job cards for her business. Job cards must be completed on smart phones or tablets at the job site at the end of each job. These digital cards are instantly forwarded to administration where the data is allocated to the specific job and an invoice is automatically generated and emailed to the client.
- Gigi notices a huge improvement in job card efficiency, a reduction in mistakes on the job card, and in the system.
- This also means a reduced turnaround time for works being completed and invoices being sent which improves administration efficiency and reduces costs.
- Gigi receives payment from clients sooner after the job is completed, resulting in a steady cash flow for her business.
- Last reviewed: 20 Dec 2021
- Last updated: 20 Dec 2021