pay regularly (e.g., insurance carrier, bank, and utility company) and ask about paying with direct debit. Some companies provide discounts to businesses that have automated direct debit set up. Even if they don’t offer a discount, you may want to arrange this service. Direct debit can save time on your company’s bill payments and save money by eliminating any late fees or penalties.
Approaching your local bank may be another opportunity to reduce your overhead expenses. Banks may be more likely to extend lines of credit to businesses that can show steady sales over the last three to five years. Securing a small business loan may allow you to consolidate debt with higher interest rates in favor of a loan with a lower payment. Another possibility is that some banks may offer better services or reduced charges for companies that do all their business with one bank. Ask a bank manager about small business options and account features.
One of the most difficult costs to change is the cost of your rent. In general, most businesses have a lease that will prevent them from moving without a significant penalty. However, in some cases it may be appropriate to consider moving. For example, an owner of a local store had noticed that improvements were being made to her strip mall location. New trees were planted, a new roof was added, the parking lot was refinished, and many other additions and changes were made. At first she didn’t think much about the new modifications; however, the landlord did get her attention when he sent the bill for all the upgrades and new features to each of the tenants. Her company’s portion of the renovation came to almost $30,000 in one month. Although she tried to work with the owner and even legally appeal the bill, her lease contract entitled him to recoup the cost of the modifications directly from each tenant. As a result, she moved her business across the street and signed a more reasonable lease with a cap on improvements and repairs.
4. Reduce Unnecessary Employee Expenses
One of the largest expenses for any employer is often the cost of employees. Employees often believe their cost is simply their salaries, but as an owner, it becomes obvious that salary is only one part of the employee expenses. A business owner may find that the costs of his or her employees can greatly exceed the cost of their salary. At some large Fortune 500 companies, the rule of thumb is to take an employee’s salary and double it to determine their cost. For small businesses, this multiplier may not be as high, but employee expenses will add up.
To begin determining your employee expenses, include all employees as well as any other individual that works for your company including consultants, interns, temporary help, and bookkeepers. However, do not include yourself in this group even if you work at your business and pay yourself a regular salary. List each of these individuals as well as their salary and any other expense associated with their employment. It may surprise you how many expenses an employee incurs. The following are some employee expenses to include:
• Overtime: Include any money regularly paid for overtime. If this occurs very infrequently, include all estimated overtime costs.
• Bonuses and/or commissions: Include any money provided to an employee as a bonus or commission payment.
• Employment taxes: Include the payroll taxes on each employee’s salary and bonuses.
• Benefit premiums: Include any company-sponsored premiums toward insurance, medical, dental, and retirement contributions.
• Benefit management expenses: Include any expenses related to providing the employee benefits. For instance, payroll services, retirement contributions, and management fees.
• Perks: Include the cost of any company perk that is offered. Company perks include any items paid for by the company that are not required by law or as a contracted benefit, including lunches, training, and company phones and cars.
• Meal reimbursement: Include an estimate for reimbursing employees for meals when they are working late.
• Mileage reimbursement: If you regularly reimburse employees for mileage, include an estimate of the monthly amount.
• Management time and expense: If you have any managers responsible for managing your employees, include the estimate of the costs spent on each employee.
• Technology costs: Include the cost of the employee workstations, resources, software licenses, and any other technology-related expenses.
• Workers’ Compensation Insurance
Try to make this list as comprehensive as possible so that you can easily see how much each employee actually costs the company.
Although the costs of each person are now in black and white, for many business owners, this is one of the hardest areas in which to reduce costs. Loyalty to one’s employees is often a characteristic of a strong leader and the idea of reducing employee numbers or benefits is abhorrent. However, during troubled times, these decisions must be weighed against the success of the company as a whole. If the company fails to survive, none of the employees will have salary or benefits; therefore, employee costs must be reviewed as part of a reasonable expense review.
Of course, costs alone cannot drive reductions in this area. In order to ensure that you correctly reduce employee costs you will need to understand not just what every employee costs, but also what each employee does. If your organization is large, this may require the assistance of your management team. From there, review the list to determine if there are any areas in which costs can be reduced. As difficult as it may be to consider, reducing your staff overhead, perhaps by extending your own hours may help you during this initial catch-up period.
The following sections outline areas that you can concentrate on to help you reduce your business costs. If you make the changes to reduce costs in these areas, you will be able to improve your profitability faster.
4.1 Reduce perks
When a company is doing well, small-business owners often pass on some of their success to their employees. Perks such as company phones, cars, extra incentive bonuses, lunches, and other activities may become commonplace. However, when the store is in trouble, these benefits should be reviewed and many should be removed until the company is in a better financial position. The easiest way to explain these reductions to the staff is to let them know that in order to move forward, all perks and bonuses will be based on the company’s performance. Further, outline when the bonuses will return. For instance, if the company hits gross sales of “x” then there will be one staff lunch. By providing benefits that are tied to the company profitability instead of simply entitlements, your employees will be motivated to grow the business, not just take advantage of its past successes.
4.2 Reduce benefits
Many companies, when they are profitable, share wealth by offering employees more benefits. However, during difficult markets, occasionally benefits may need to be trimmed to continue to stay competitive.
Health-care plans are an area that you may want to review. Health-care coverage and premiums are constantly changing. Furthermore, regulations around health-care options are also changing dramatically. Reduce your health-care employee expenses by shopping around, comparing benefits and costs.
In some cases, small-business owners may find that it is better for their employees if the company drops their medical plan and switches to a medical reimbursement plan. Although this may sound unusual, for many this will reduce the company’s costs and improve the employees’ medical options. (For more creative health-care alternatives for Americans, read The New Health Insurance Solution, by Paul Zane Pilzer.)
