How to Lower Business Expenses Responsibly
When looking to increase efficiency or profits in your business, simply slashing expenses is not (necessarily) efficient. In fact, this behavior is why efficiency sometimes gets a bad rap. Recall that every decision has a ripple effect across your organization. Making responsible choices to save money means ensuring that your cost-saving measures don’t mean you’re ultimately paying more in the way of product quality, customer satisfaction, and/or time.
Gather up the books
The process for analyzing expenses isn’t secret or complex: Start by pulling out past years’ expense receipts.
If you’re committed to expense reduction, or if you have a relatively small number of expenses, you want to go through every single one. If you want to start with a sampling, you can either start with the largest expenses, or with the largest category of expenses.
For the biggest potential cost savings, focus on variable expenses (which you can separate from fixed expenses) first, because lowering those costs means you save every time you produce or sell a product.
For the fastest cost savings, focus on fixed expenses. Your list of fixed expenses is probably much shorter than your variable ones, and needs review less often. You can (and should) literally keep a checklist of fixed expenses with the last date you reviewed it, so you can keep an eye on them at least once per year.
Categorizing your expenses has two main benefits. One, it lets you create a pie chart so you can understand at a glance where the majority of your money is going. The biggest piece of the pie is usually the place to start hunting for inefficiencies and cost savings first.
Second, it makes filing taxes much simpler and faster if your expenses are already aligned to IRS expense categories. Should you ever be audited, it also makes it easier to pull your records and justify your deductions.
Allegedly, if your business spends an unusually high amount in a given category as compared to other businesses in your sector, the IRS is more likely to audit you. If you are rushing to categorize expenses last-minute, you increase the risk of miscategorizing or, in extreme cases, simply lumping all expenses into a single umbrella category and potentially showing an unusually high number, triggering an audit.
Some accounting software contains all the typical Schedule C categories in addition to a myriad of other categories. This can make it harder to reconcile come tax time.
Implement a streamlined accounting process that automatically enters each tax-deductible expense into your accounting system as it’s spent (or reimbursed). Categorize each expense in the moment, rather than waiting until you file taxes to group expenses by travel, office supplies, and so on.
Find out if you’re paying too much
The easiest way to review an expense is to identify other providers and compare your current rate to the rates they are offering. You can usually accomplish this with an Internet search or a phone call.
There’s no secret trick here, except that you have to know and remember to shop around for better rates on your expenses. Here are some common cost savings to uncover:
Lowering costs by changing your packaging. Shipping costs are based on both weight and package dimensions; if you have nonstandard dimensions, you often pay additional processing fees. There’s also potential savings in buying packaging materials in bulk or from different vendors. Remember that using sub-par shipping materials means your product falls apart or gets soggy, so don’t go too cheap.
Full-time positions you can switch to contractors. Swapping the same employee from a salaried spot to a contractor (who does not receive benefits and who pays his own taxes directly, saving your organization significant money) isn’t bound to work well, because that individual will probably be resentful and quit.
However, you can look forward and determine if certain positions or departments are better served with contractor positions. This is an important consideration for time-limited positions that too many organizations reflexively hire on permanently when they really only need a year of work.
Software you can move into the Cloud. Software is something you install on a single computer and that you can only access from computers on which that software is installed. When you move to the Cloud, you can access your information from any Internet-enabled computer or device.
Not only are Cloud services generally more efficient and easier to customize than software titles — not to mention, you never have to upgrade services that live in the Cloud, eliminating a whole class of upgrade fees and IT expert hours — but they’re also generally way more affordable.
Custom software you can move to vendor-supplied titles. As recently as a few years ago, it was often more cost-effective (and simply felt better to many executives) to hire contractors to build custom software to handle routine business processes like accounting, human resources, or inventory and fulfillment.
Today, not only are there powerful options in the Cloud to handle all these needs, but they come complete with something known as an API, which lets a programmer build customizations and integrations on top of the standard platform.
If you’re considering switching services or software titles, don’t forget to account for the hidden costs: data transfer, customization, training, downtime, and initially less-productive employees as they learn a new system.
Make sure you compare actual rates and not promotional rates — for example, most Internet providers offer a very low rate for the first six months, and then bump you to a much higher one.
Internet- and software-related expenses are particularly likely to drop significantly in price over a short period of time. Avoid signing multiyear contracts, and pay particular attention when contract renewals come up to whether you have cheaper alternatives.
It’s also helpful to simply get a number of employee eyeballs on your expenses for a gut check. There is no exhaustive directory in which you can look up the price you should pay for a given service, but individuals within your organization may have particular domain knowledge to know whether certain costs are within (or well out of) range.
Call your current providers once per year to find out if there’s a better rate or package that can save your business money. This strategy works on everything from getting a lower corporate credit card interest rate to negotiating better supply costs because your purchase volume has increased.