(Time to read this Blog article is about 2.5 minutes)
Reducing your operating expense by just 5% can grow your bottom line by 20% or more. Trust me on this or check with your accountant. If your accountant can’t explain this to you, get a new accountant. Here are my 11 ideas to reduce your operating expense that have worked for 100s of our clients. They won’t all apply to your business…but many of them will.
- First, make a list of your 20 biggest expense items. Clearly, they have the most potential for significant savings. Ask suppliers what opportunities or special terms you’re missing out on, for whatever reason. Ask them for their thoughts on how you can operate more efficiently.
Your suppliers know stuff…and the good ones actually like it when you ask for help. The Papa John’s pizza chain partnered with their oven supplier to create a new conveyor oven that cooks pizzas 2 minutes faster and reduces energy costs by 25%. This also allowed them to offer a time guarantee that increased their lunch business considerably. How might you truly ‘partner’ with your suppliers rather than just reaming them out for lower prices?
Outside industry experts can also spot major opportunities to improve your efficiency quickly and affordably. An outside set of eyes can make a big difference. Who are the ‘industry experts’ in your field?
- Renegotiate every contract from maintenance and grounds keeping to insurance, phone and office equipment. Ask those suppliers how you can save money so that you can stay with them and grow together. Be nice, be firm, be fair and switch suppliers if necessary.
One of our clients, with sales of about $6.5 million, saved $30,000 a year by switching credit and debit card processing firms.
- Check with your Industry or Trade Association to see what special rates they’ve negotiated on your behalf on things like insurance, car rental, hotel rates and employee benefits. If your Association has done nothing to negotiate savings for its members, suggest that they should do so.
- Where or when are you overstaffed, or keeping non-performers who are costing you money, time and, perhaps, customers? What’s it costing you not to deal with non-performance? How can you adjust staffing without hurting your service levels?
- Are you wasting space? One of our coaching clients reduced office space while growing their staff from 28 people to 45. How did they do it? They took the gutsy step of ditching ‘assigned seating’. Because their staff are in the office for only a small part of their normal work week, desks and computers are available on a first come, first served basis. The result? They saved $60,000 a year in rent and another $40,000 on IT costs. Do you have excess space or facilities that could be sold or rented out?
- Embrace the power of ‘Lean’ thinking. Many smart manufacturers and service providers are adopting ‘Lean’ principles to create an efficiency advantage. ‘Lean Principles’ are a disciplined approach to looking at the value added by each step in a productive process, and how to do it better. You’ll find ‘Lean’ practitioners in your area by searching the internet.
Here’s an example of the kinds of extraordinary efficiencies that can be achieved. For the past 58 years, Rowe Furniture Inc in the USA has produced quality upholstered furniture, but it took six weeks to complete a customer order. That’s the generally accepted production cycle in the furniture industry…but it drives retail dealers and consumers nuts.
So, to improve efficiency and create a compelling competitive advantage, Rowe’s management decided to cut the 6 weeks down to 10 days. They committed to the concept of ‘The 10 day Sofa’. They reorganized their production lines around ‘Lean’ principles, retrained their employees and made it happen. Production employees now produce more product, earn more money, get more time off and absenteeism is nearly half what it used to be.
If you manufacture or distribute anything, or run a complex service business, looking into ‘Lean’ could be one of the smartest things you do this year.
- Another important way to reduce expenses is make sure your customers pay on time. Not managing cash flow is one of the biggest reasons for failure in small and medium size businesses. If you sell to consumers who pay by credit card, it’s not a problem, but if you extend credit, don’t let your Accounts Receivable get out of hand. It can kill you.
Often, small customers don’t pay because they can’t and big customers don’t pay because they’re bastards. They want your absolutely lowest price and then keep you waiting months for payment. Don’t be so desperate for business that you have to deal with unprofitable customers.
Sometimes it’s our own fault. We fail to invoice promptly or follow up diligently. Receivables don’t get better with age and writing off bad debts can destroy your bottom line.
I had a client doing $1.8 million in sales with Accounts Receivable of over $600,000, mainly because they had their pathologically shy ex son-in-law in charge of finances, and he was too shy to call clients and ask for payment. I do not make this stuff up.
- Where might you be wasting materials or supplies? Pennies add up. I’m always amazed when take-out restaurants give me a week’s supply of napkins with a $15 food order.
One independent Pizza Restaurant invested just $40 on plastic bins and Ziploc bags to control cheese waste on the ‘make line’ and immediately improved her bottom line by 24%.
St. Mary’s River Smokehouses, in beautiful Nova Scotia, have turned small strips of salmon belly, formerly discarded, into a tasty and popular snack product. They’re smoked and then ‘peppered’ or glazed with maple syrup, attractively packaged, well priced and selling well.
- Get creative. Cathay Pacific Airlines reduced the weight of each of their air freight 747 aircraft by 200 kg by removing the exterior paint and saved $200,000 in fuel, per plane, per year. That’s huge! Then, they renamed their now shiny, paintless air freight fleet ‘The Silver Bullets’. Brilliant marketing!
By changing the packaging of their Kirkland Brand cashew nuts from round jars to square jars, Costco now fits 50% more jars on each pallet. It’s called ‘cube utilization’…using space more efficiently. This saves the shipping expense on 600 truckloads per year.
- Embrace all the ways that technology can help you operate more efficiently in every part of your business. Every business needs a sharp ‘Technology Advisor’. This is very different from a ‘break / fix’ technology repair person. Who’s your expert ‘Technology Advisor’?
One of our medium sized clients is now saving $30,000 a year by hosting their data off-site in ‘the Cloud’.
Note: Your staff will have lots of ideas on how you can operate more efficiently and they’ve been waiting for you to ask…so ask them. Add this subject to your regular Staff Meetings or, three times a year create a specific 2-hour ‘Idea Fest’ where everyone must come up with at least one idea to operate more effectively. Give them at least a week’s advance notice so they can do their homework. Then, let them vote on whose idea was best and give the winner $100, or dinner coupons from a wonderful high-end restaurant. The dinner coupons allow them to be heroes to their spouse or special friend…and that’s a bonus.
So, what will you do, starting right now, to think and act more frugally, and to reduce expenses by 5% or more? Repeat this exercise at least once a year. Keeping expenses down is an ongoing battle, not a one-time event.