Cutting costs should always be a priority for small businesses. In 2024, it will be a necessity. Economic indicators suggest that prices will continue to increase and interest rates for business loans and lines of credit will not be coming down any time soon. Neither will the unemployment rate. Expect that to rise as the AI paradigm shift takes hold.
The consumer price index is still over 3% through November 2023. That creates a bleak economic outlook for the new year. The recovery from the 2020 pandemic was breathtaking when the stock market surged and interest rates were low. As the next “new normal” sets in, business owners need to adjust accordingly. Here are a few ways to do that.
1. Create a New Financial Plan
Throw the old financial plan out and start from scratch. You can use the same template if you want, but all the numbers will be different. Start with the business budget. Costs and expenses will be higher. Hopefully, revenue will be up also. That may change as economic conditions tighten, so redo your sales projections to include several different scenarios.
When reviewing the budget, look at categories where you can cut or eliminate non-essential expenses. Subscriptions are a good example of this. Many companies don’t do regular reviews on paid subscriptions, so they continue to get paid each month or year. Checking on which subscriptions are useful and canceling those that aren’t can lead to significant savings.
2. Install Expense Tracking Software
The creation of a financial plan may reveal some vulnerabilities that need to be addressed. One of them is the ability to track expenses. Small business owners work too hard to not know where their money is going. Modern expense tracking software can identify and categorize legitimate spending and reveal expenses that can be eliminated.
Expense tracking software also helps your company break down operating and non-operating expenses, an important distinction in accounting. Using tracking tools that either connect or are part of accounting software like QuickBooks simplifies this further. Identifying tax deductions is another way to cut costs. Not all expenses are deductible.
3. Measure Your Company Against Your Competitors
Industry metrics are important for determining how your company is doing in the space you’re operating in. That means measuring yourself against your competitors. Look up any metrics you can find that will help you do that. Financial reports are a good way to compare cash flow statements and balance sheets. You can find them online for any public company.
Smaller companies that aren’t traded publicly can do price comparisons or use SEO software to track website metrics. Examples of this are Moz Pro and SEMrush. Both offer toolbars and extensions that can be used to track website traffic and backlinks. These numbers can be particularly useful for a cost evaluation of an e-commerce website.
4. Evaluate Fixed Costs Versus Variable Costs
Fixed costs on a variable income stream can be great if the revenue is high and costs are low. Reverse the two variables and those costs can be an albatross for a small business. Converting them into variable costs can help protect your company from a potentially disastrous financial scenario. It’s not always possible, but it can be done in some situations.
An example of this is to review “standing” orders of supplies and materials that you get from vendors. Items in that supply closet might be piling up. Materials for product manufacturing might not match the amount of product you’re putting out. Adjusting your ordering in these categories can bring your profit margin back in line with your financial projections.
5. Renegotiate Vendor Contracts
Adjusting order quantities is one step you can take to bring down vendor expenses. Another is to renegotiate vendor contracts that include minimum order quantities and expected order frequencies. The vendors’ costs are up also, so most of them are willing to be more flexible with how their contracts are structured. Don’t be afraid to push for a better deal.
Another option to consider here is switching vendors. Loyalty is commendable, but business is business. If you’re already negotiating a new contract with an existing vendor, reach out to their competitors to see what they offer. A few additional offers will give you leverage in the conversation with your steady supplier. Those “levers” are important to driving costs down.
6. Upgrade Your Technology
Good technology is not an expense. It’s an investment. Examples of this are expense tracking software, email marketing programs you can automate, and AI applications that can chat with your customers. These technology applications can save your company money over time. They’re worth investing in before we get into the new year.
Plan to do this frequently. Technology moves quickly. AI development is a paradigm shift, not just a novelty. That means evaluating it regularly and adopting the right AI applications could be critical to your company’s success. We’re already seeing this in the accounting sector. Keep an eye open for AI development in your industry. It’s likely already there.
7. Incentivize Employees To Do More
Pushing your people to do more without offering them performance incentives is a recipe for high employee turnover. It’s also important to give them the right tools to accomplish what you’re asking them to do. Those technology upgrades we suggested earlier are a good start. AI doesn’t necessarily replace humans. It can be used to enhance their abilities.
Think about it this way. ChatGPT can have a conversation with a client in the chat box, but it takes a human being to monitor those chats and make sure any required actions are taken. Removing the human from the chat portion of this operation frees them up to focus on actions, increasing their bandwidth in that area. That will save your company money.
