Reducing the Operating Cost of Your Small Business
- Jun 21, 2018
If you’re a small business owner, then you know it takes a lot to get your company up off of the ground. And, even that is an understatement. The direct costs of rent and supplies are loaded in themselves, but there are also employees to be paid and outsourcing to be done. It’s important to budget your money and invest it into people and resources that will benefit the business in the long-run.
Overspending where you can ultimately save is the biggest mistake new companies typically make. Along with hacks on how to save, we’ll also cover when it’s time to borrow money and what it means when you hire new employees.
The Most Important Aspect of Business Expenses is Predictability, Not Size
No person starts a business with the knowledge of what’s to come in the future. It also doesn’t start on a successful, nation or global-wide level. Every company and service begins as an idea with the hopes of it becoming a large, widely desired reality. Think of your favorite brand or company. There was a time where no one knew it was in existence, but it survived, partially because there was a budget managed due to the battle of zero predictability.
The size of the company is simply quantity, but that’s not what makes the business thrive. It’s how it’s developed and sustained through planning, budgeting and working hard. Just because you’re a new owner of a small business doesn’t mean you can’t compete with your leading competitors. In fact, your local business has the advantage of creating one-on-one relationships with the consumers. It’s important to know your audience in any job you’re completing.
The size of the business expense doesn't matter if you're planning ahead. In terms of the future, you want to have a strategic plan of where you want your business to go and what audience you want to cater to. Have a cushion of financial savings to fall on in unpredictable situations, such as slow months or a business crisis. Cut your business expenses by hiring quality people over quantity. Though we will talk about this later – your business becomes more efficient with size.
Balancing Long-Term Benefit to Immediate Cost
As mentioned above, starting a business from scratch can do some damage on your wallet. The operating cost can be high, especially in the beginning stages. It’s first helpful to set a budget of what you can spend in terms of rent, upkeep and necessary supplies. Do this by figuring out an operating profit margin. This is your operating costs divided by your revenue. Bizfluent reports that according to S&P 500, the average profit margin for those companies was 11 percent in 2017. So, for every $100,000 they made, $11,000 of that was the operating cost. The lower the percent, the better as that means your company is saving more cash. However, Bizfluent says, “you don’t need to have the lowest profit margins on the block to be successful. Find a place where you’re most comfortable and make it your goal to operate from there.”
It can be good to invest more in your company if you know it will benefit everyone in the future. As a boss or manager of any company, it should be your goal to set your employees up for success. You may do this after finding the right leadership style, though another tactic is to invest in the tools and supplies you’re providing your team. Would you continuously purchase a generic stapler for your staff that keeps jamming instead of investing in a quality electric stapler that is effortless and time saving? Probably not. It’s the same situation with your business. Splurge on tools that are going to last and avoid recurring costs. Spending extra on your employees will limit the cost of retraining or onboarding.
When to Borrow Money
It’s rare that all operating costs can be covered out of pocket. There are times when you need assistance. When you can’t move forward with your business without a certain piece of equipment or service, you may need to take out a loan. Do this especially if the purchase will continue to progress your business and if it’s not a recurring cost. Will that piece of equipment or inventory help fulfill multiple customers rather than just a single consumer (meaning more profit)?
However, don’t wait to borrow the money when you’re in a desperate, final chance situation. This may lead you to accumulate more debt if you really can’t afford to pay it back.
New Employees Are Costly for Small Businesses
Remember when we mentioned that your business gets more efficient with size? That’s true. According to Forbes, a study by the Centre for Economics and Business Research and UK’s Federation of Small Business concluded that the first hire is the most expensive. A business with a single employee and one owner has an average employment cost of $56,770 per worker, while a business with 20 to 49 employees has an average of $40,165.
Among salary cost, small businesses typically pay more in terms of taxes, insurance, legal fees, pensions and absences. Though, this all circles back to investing in your workers. On top of these expenses, you may also have to dish out money towards training and individual employee needs. Though, this will limit recurring costs and turnover, plus increase the quality of completed work. Turnover can be dangerous especially for upcoming businesses as Money Crashersreported that the Center for American Progress found that replacing an employee can cost up to 20 percent of the employee’s salary (for recruitment fees.)
Outsource Whenever You Can
Reducing business expenses is the goal as a small business owner. Outsourcing can take some of the weight off of yourself/staff and save you money. Do your research on what services are best to outsource for your type of business. Bookkeeping and payroll are just some of the responsibilities that can be outsourced. Freelancers for services such as marketing or content writing are also cheaper and can save you.
Conclusion: Save Where You Can, But Spend More Where You Should
All in all, buy all the materials you will absolutely need for your small business, then budget and save for the “extra” costs that will benefit your company at a later date. Splurge on items that will last like that three-hole punch or high-end printer. Though, buy used tools when it involves a significant price cut. Your goal is to grow your business while maintaining a solid budget and employee retention (as that will save you recurring costs).
Remember, don’t be down on yourself if you’re not automatically competing with the top of your market. Having a plan for the future will knock out any unpredictability and set your company up for its utmost success. Though, be sure to maintain those interpersonal consumer relationships that will guarantee you customers for years to come. A balance between saving and spending is the key to reducing the operation cost of your small business.
