Small business owners have to make pragmatic decisions to make sure their business is running effectively. Reducing costs can be seen as a negative step, particularly amongst concerned employees, however taking a frank look at your outgoings and looking for efficiencies is an ongoing and essential task. By applying their understanding of what adds the most value and what matters to their customers, they can make those decisions while also protecting the long-term wellbeing of their business.
On average, small businesses have seen a 30% drop in income as a direct result of the pandemic. This has forced many business owners to have a conversation about cost reduction for the first time. More than half of all SMEs (67%)1 have already taken steps to reduce their costs and, as we see the longer-term impact of the recession, many more may also need to follow this course of action. While this can be an uncomfortable situation to be in, for businesses that do undertake a cost-efficiency programme, the savings can be significant. The average SME that has already been through this process during the course of 2020 has managed to reduce their business’ costs by nearly a quarter (25%)1.
Different areas of expenditure to consider
There are a number of ways to reduce costs in your business
- Make sure your suppliers are competitive
One of the most important steps that small businesses can take is a supply chain audit. It’s important to understand both the efficiency and cost of any suppliers they use, from the businesses who provide you with product materials, all the way down to your utility providers. Having a frank and open conversation with these partners about where you are seeing value and where you need to make efficiencies can lead to compromises or better offers. If this is not possible, you may be able to find cheaper or more effective suppliers elsewhere – a move taken by 7% of all UK SMEs this year2.
It’s also important to understand what broader changes might impact your suppliers, such as the UK’s exit from the European Union.
- Scrutinise non-essential overhead costs
Many SMEs may have entered 2020 with plans to spend money on various projects such as an office refresh, the introduction of new technology or some fun perks to improve company culture.
Due to the challenges that many will have faced this year, it often calls for these plans to be put on hold, either temporarily or indefinitely. This can be disappointing, but most people will understand the need to tighten their belt in the face of broader difficulties.
When doing this, make a list of any non-essential spending and then order it in terms of priority. It’s important that in making savings, you don’t overlook how non-essential spending might help your business improve its bottom line. For instance, while investment in IT systems might not be technically essential, if many of your employees are working remotely, it can have a significant impact on their productivity. Consider these cost-savings carefully and make sure you consult with your team in advance, so you can understand the impact of delaying or cancelling any investment.
- Rent reductions and payment holidays
While many people will undertake a cost-efficiency programme to find longer-term savings, if you are facing immediate difficulties, it is advisable to discuss these with your key payees, be it your landlord or financial service provider. Transparency can ensure you come to a workable situation where both parties are clear on what is required.
- Reducing your headcount or employee salaries
Making reductions to salaries or undergoing a programme of redundancies is something that small business owners rarely take lightly. SMEs are often close to their employees and such decisions can impact your entire team’s morale and wellbeing. However, we know this is a difficult step that many SMEs will need to take.
If you do need to reduce salaries or even make employees redundant, make sure you follow a fair and open process that uses internal consultations effectively, allowing all parties to be heard. Open communication is vital even if, at times, it feels uncomfortable. Give employees as much notice and detail as you can, this allows them to plan ahead and make arrangements if necessary. Your employees will appreciate this transparency and will be less likely to fear further cuts if you’re clear from the start.
How to manage employees’ cost-cutting fears
People are creatures of habit and it’s possible your employees could have concerns if they see a significant amount of change taking place within the business. In the context of a recession, it’s only natural that it will make them worried about the strength of the business and their place within it. A communications plan around any cost-cutting can ensure you don’t see any unfounded rumours or spread of misinformation.
Everyone asks a similar question during times of transition: “What does this mean for me?” Help people understand the future that you are building towards and the role you see them playing in it. Make sure you have a frank and open conversation about what you’re doing and why. It makes sense to involve employees in the discussion not only to reassure them, but they might help to identify potential areas for savings. You may face less resistance if you implement changes that will directly impact their day-to-day role, such as introducing a new IT system.