[This article was written by Keith Coppersmith.]
For a business to increase its profits, it needs to be able to do two things: increase revenue and decrease expenses. Although the act of reducing costs isn’t easy, as it usually involves leaving something you would like to have, when a business isn’t able to deal with its liabilities (or is already past that point), reducing costs becomes mandatory.
However, doing so is the most effective and efficient manner of saving cash without necessarily having a negative impact on product quality or the range of employees’ salary. Instead of causing issues in such areas, reducing operational expenses in an adequate way has the additional benefits of improving existing business processes and even doing something good for the planet.
The Toyota production system
The Toyota production system was built around the elimination of deviations that show the inefficient allocation of resources. The first concept in it is called Muda – meaning wastefulness, futility, and uselessness – which is contradicting value-addition. Value-added work is a process which adds value to the service or production that the customer is willing to pay for.
There are two types of Muda. The first includes non-value-added activities in the process necessary for the end consumer. For instance, safety testing and inspection don’t directly add value but are required activities to ensure a safe product for the consumer. The second also includes non-value-added activities, but these aren’t necessary for the consumer. As a result, the second type should be eliminated. It has seven categories:
- Inventory – excess stock of goods and raw materials
- Transport – excess movement of products
- Motion – excess movement of machines or people
The second concept is called Mura (unevenness, irregularity). Mura causes the existence of any of the seven wastes. For instance, a product needs to pass through several workstations in a manufacturing line during an assembly process. If the capacity of one station is bigger than the other ones, there will be an accumulation of waste in the form of overproduction, waiting, etc. This can be avoided with the Just-in-Time system – delivering and producing the right part, at the right moment, at the right amount.
Businesses looking to reduce operational costs should consider whether cash can be saved by outsourcing functions to external consultants or agencies. As you outsource tasks to skilled workers across the globe, you get to save on labor and still receive the same quality of work.
For instance, a company that has an outsourced sales team understands that there is so much competition in the marketplace that finding an innovative, reliable, and results-driven freelancer or business to employ doesn’t necessarily mean spending a lot of money. Professionals can ensure that your customers are happy, engaged and continue using your service or product. This is especially helpful for small-to-medium businesses, who may not need a full-time sales team and find it more cost-efficient to hire them part-time.
The same goes for digital marketing functions such as pay-per-click advertising or search engine optimization, which is often more effectively managed by agencies, again at competitive rates that are cheaper than having an internal staff, as well as more productive in generating income.
Take a look at your administrative processes and find those that can be automated using technology, rather than manpower. There are several solutions online that could automate your small business functions at a fraction of the cost when compared to having employees. With the automation of repetitive tasks, you get to save hours of manual efforts, allowing your workers to use this time to improve business productivity. They are as follows:
- Reduce payroll burden – rather than having internal accountants, you could incorporate an accounting and invoicing software.
- Fewer office essentials – you can use digital communication software, such as Google Voice or Skype, rather than paying bills for landlines and mobile usage. Or, instead of using paper documents, try Google Drive and BaseCamp for document centralization and file storage.
- Lower travel costs – commuting expenses and travel allowances hold a significant share in the total operational costs for any company. To save, you could organize meetings and presentations online via software like Cisco WebEx or MeetingBurner.
This is a rare area where you not only reduce operational costs but also generate other benefits for your business, as well as for the planet as a whole. There are enormous cost savings to be made by looking at the way your company consumes resources as a part of a low carbon scheme. Moreover, doing so is an excellent method to demonstrate your business’s social responsibility by doing something about reducing your environmental impact.
Any business can save money when it reduces the waste of resources or money spent on things like unnecessary printing in the office and reducing emissions in the manufacturing process. The previous sub-headings already explained how to do this. Green solutions for lighting and heating will, in turn, reduce energy bills. Sustainability and reducing waste are not only great for the planet but will also improve your brand image and credibility.
Reducing your operational expenses is a proven practice for increasing profit margins. This comes in various forms – finding and reducing wasteful processes, outsourcing functions to outside experts, or using technology instead of manpower. Ultimately, it’s possible to not only lower your expenses but also do something good for others.