Entrepreneurs are usually focussed, visioned and enthusiastic individuals. They may have a unique skill or have seen a niche in the market place that they can exploit. A small business is started and through their focussed determination, the business grows rapidly.
All too often the small business will focus on growth and leave overheads to spiral out of control, stifling cash flow. During such tough economic times as we see today, this is a very important area of any business that needs to be managed very carefully.
When Rob Haward inspected the books at Riverford Organic, which delivers fruit and vegetable boxes to homes across the country, he was shocked at what he discovered.
“We didn’t have monthly reporting, or anything like it,” said Haward, former operations director and now managing director at Riverford, which turns over £30m and employs 400 people.
“It was also unclear who was responsible for sales, which was ridiculous. Between 2004 and 2008 we had experienced amazing growth so our eye was on the ball in terms of capacity – but off the ball in terms of our costs.”
The company, which started as a one-man operation in 1993, appointed a managing director, Jack Slatter, and a new finance director, Steve Tarr, to work with Haward on knocking it into shape. Tarr began to produce monthly accounts highlighting the costs. The four farms providing the vegetables that are delivered to 40,000 homes per week were turned into semi-autonomous profit centres.
Then Haward and his team looked at labour and raw materials – the biggest direct costs for the firm, based in the Devon town of Buckfastleigh. They soon found that even small changes could be effective. Simplifying the layout of the packing shed improved productivity, as did buying a salad bagging machine, which did the jobs of eight people.
The results were astounding. In just two years, from 2008 to 2010, Riverford Organic made savings of nearly £2m. This included cutting the labour bill by £200,000 – an 8% reduction – and saving £1.6m on raw materials. It has slashed spending on office supplies and work clothes by 35% and plans to do the same on IT and phone bills.
“We haven’t done anything particularly dramatic,” says Haward, 36, who recently succeeded Slatter. “We just manage things better and are more in control.”
Rachel Bridge | 2011 | The Sunday Times | 11th September
Cost cutting measures can lead to very fast results, which is good news in an economy where sustained growth is difficult, time consuming and expensive to achieve. If we take a typical average client of ours with a 10% profit margin, they would have to raise sales by £100,000 to achieve the same bottom line result as cutting costs by £10,000.
Any successful business is a team effort and it is important that employees understand that. A cost conscious culture should be developed and savings made by employees recognised and rewarded. Consider training staff, with the responsibility for buying, to enable them to get the best possible price in different situations. Shop around for different suppliers, for everything from raw materials, office stationery to utilities. Every company out there is hungry for your business and will be willing to do competitive deals. Become market wise – the more informed you are the more likely you are to know what is good value and the better prepared you will be to negotiate a better deal.
In the early years of a small business it is often a lack of cash flow that undermines it’s potential success. A tight control of costs is therefore a key element to the effective navigation through these formative years, particularly in such a harsh economic climate.
6 ways to reduce business costs
Shop around between energy suppliers. There are many price comparison websites and good deals available for switching energy suppliers. There can be as much as a 50% variation in costs between the lowest and highest rates offered.
Invest in a good Accountant. It may seem counterintuitive to shell out for an accountant or tax service professional to do your bookkeeping, but they are likely to find reductions that you might have overlooked. Often the savings found will cover the accountants costs for the year.
Make smart hiring decisions. If you have to hire a new employee, hire someone who has multiple strengths. They don’t need to have a degree in Computer Science, but if your new sales rep also knows how to check your IT systems, that’s a huge saving on hiring someone in.
Use technology. Technology allows us to save money and advance our businesses in ways that weren’t possible even five years ago. From teleconference services and online payment services, to open-source software and remote desktop applications, there are many ways you can reduce business costs with technology.
Go paperless. The cost of paper, ink, mailing supplies and postage may seem minimal at times, but it can add up to a large business expense. Going paperless by not printing unless absolutely necessary, transitioning to a digital invoice and bill payment system, and filing all important paperwork on your computer instead of a file cabinet can help you reduce some of the most common recurring business costs.
Explore an alternative place of business. The expenses that come with having a physical place of business can be immense, and in many cases, this is unavoidable. If you are in a situation that can change, however, you may be able to reduce your business costs dramatically by downsizing your retail location, exploring a co-working arrangement, or even converting your business to a home-based business.