4 Tips for Reducing Business Expenses
Efficient monitoring, optimization, and management of business expenses are essential, especially for companies that, for one reason or another, cannot devote the time and resources required for timely and meticulous expense management.
I am referring in particular to companies that fall into these categories or are currently experiencing a phase in their development that aligns with one or more of these scenarios:
- Start-ups
- Companies that have grown rapidly in a short period of time
- Highly operational companies
- Family-run companies
- Companies without a dedicated Purchasing Department
- Companies heavily focused on a “core” and critical project
- Companies with significant change management issues
- Companies focused on resolving major order/revenue issues
Unfortunately, the last point sounds very familiar and highly relevant today.
The best course of action these companies could take would certainly be to engage a consulting firm with extensive experience in optimizing fixed, general, and indirect expenses; but this is not always possible.
Is there perhaps only an abyss ahead for these companies? Certainly not.
Let’s look at some useful suggestions.
1. TRACK AND CATALOG EXPENSES AT EVERY ORGANIZATIONAL LEVEL
Some of the people who follow me most closely on LinkedIn know of my admiration for Peter Drucker, considered by many to be the founder of modern business management. To quote one of his famous maxims: “If you can’t measure it, you can’t manage it,” the first point I’d like to suggest stems directly from this.
However, I’d like to go deeper than simply recommending that you track company expenses with painstaking meticulousness. My key suggestion is that this activity shouldn’t remain solely at the level of the Finance and/or Administrative Department, Area Manager, or District Manager.
Team managers should devote sufficient time and energy to investing in their people, teaching each team member how to track the company expenses within their purview. These may include expenses related to the quality department, the travel & business travel department, general services, or IT.
The department manager should explain to the team why this is important, how to categorize expenses, and how to identify which ones can be reduced or eliminated.
You will be surprised by how engaged your employees will feel in this process, generating ideas of their own to further optimize costs.
And the department manager will finally have a cost area under control and one more reason to reward the most deserving employees.
This simple action, therefore, brings numerous interconnected benefits to the organization:
- Control and optimization of expenses;
- Reduction of waste;
- Empowerment of staff;
- A solid foundation for implementing a rewards program.
2. LEVERAGE TECHNOLOGY, WHICH IS OUR FRIEND
The most modernly organized companies use ERP and/or other systems that, thanks to specific modules or fully dedicated features, allow for tracking the entire procurement process.
Some companies, however, whether by choice or for various reasons, do not use these dedicated and sophisticated systems.
At the opposite extreme lies the good old Excel spreadsheet—or even a compatible alternative.
Between these two extremes, there is a whole range of tools, both free and freemium (i.e., free for basic functions and paid depending on the more advanced options you intend to use, even at a later stage).
My suggestion is to test one or more of these applications and, in line with what was mentioned in the previous point, ensure that all levels of the organization use them. In this case, it will be important to agree on the tool to use, so that different departments use the same tool. This will facilitate teamwork and the subsequent comparison of data across different departments, handled by the administrative department.
It’s easy to find examples of these packages by searching Google using keywords such as “Free expense management software,” “Free cost management templates,” and so on.
3. CATALOG FROM THE TOP DOWN
The third suggestion is to categorize expenses not only by type—for example, “Travel Expenses,” “Material Shipments,” and so on—but above all to create the first macro-level grouping, dividing them into:
- Fixed or Variable Expenses
- Product-Related Expenses (production costs) or General/Administrative Expenses
It will therefore be important to implement the most suitable strategy to minimize fixed expenses in favor of variable ones (or to convert fixed expenses into variable ones) and similarly to reduce as much as possible general and administrative expenses that are not specifically related to the production of a good or service.
There is no precise rule that applies in every situation to achieve this change, just as this suggestion should be understood as a general guideline.
In fact, it is not possible to determine in advance whether it is absolutely better for a specific company to have more variable costs or fixed costs (and by how much), but the general concept of preferring variable costs over fixed costs is often the basis for managing a company aimed at achieving a more consistent gross operating margin—that is, with fewer fluctuations dictated by changes in production.
4. CONSIDER EACH PRODUCT OR SERVICE IN THE CONTEXT OF MAKE OR BUY
This choice, which will become strategic, will lead to a decision for each product or service provided by the company (or used by the company as part of its value chain) as to whether it is better to produce it internally or to purchase it—entirely or partially—externally.
The considerations underlying the evaluation will vary, not only for each company involved but even for each product and service within the same company.
In this context, I do not intend to suggest what is best to do (it is not possible to do so here!), but rather to remind you that part of the evaluation will be conducted in quantitative terms. In other words, it will be necessary to understand and calculate which investments will be required for in-house production and which costs will instead be incurred to purchase externally what needs to be outsourced.
The reason why this strategic-level decision is inextricably linked to cost optimization can be summarized as follows:
- Optimizing corporate costs will free up additional financial resources, which can then be further allocated to the investments required for “make.”
- Optimizing fixed, general, and indirect corporate costs will lead to the best possible choice of supplier, making it more cost-effective to outsource a product or service so the company can focus on its core activities.
Thus, the decision between “make” or “buy” will not be tied solely to the brand or to actual or perceived quality, nor will it be merely a matter of pure production cost; rather, it must be considered a quantitatively achievable goal, also depending on the company’s ability to optimize its costs and select suppliers that offer the best quality-to-cost ratio available on the market.
