How to reduce business expenses in an uncertain economy

Businesses often need to be able to reduce expenses to remain competitive in their industries. This is especially true during times of economic volatility. While cutting costs may not be the most effective long-term business strategy, it can help companies weather tough times in the short run.

In this article, we’ll explore different strategies you can use to reduce business expenses and stay prepared for whatever lies ahead.

Two types of business expenses

Businesses generally have two types of expenses: overhead and operating. Managing both and staying within a budget is essential for keeping your business running smoothly.

Overhead expenses are the fixed costs your business incurs to keep it going. This includes recurring expenses like rent, business loan obligations, utilities, and insurance. These are expenses you must be prepared to meet whether or not your business is making enough money to cover them.

Operating expenses include what’s necessary to pay for the revenue-producing activities of a business. Operational costs are variable and often depend on the day-to-day volume of sales. They differ from industry to industry but can include materials to produce products, marketing expenses, inventory, and transportation.

How to approach cutting costs

Cutting business costs can be difficult. It may seem like there’s nothing you can trim from your expenses without negatively impacting your growth activities. However, there’s almost always flexibility in your budget when it comes to reducing costs.

Here are some strategies to consider:

●      Don’t just cut—optimize: Instead of cutting for short-term gains, look for ways to add value to your business by streamlining operations for the long haul. Create an optimization framework and invest your time and capital toward higher impact work.

●      Simplify and focus: You likely have a few products or services that generate the greatest ROI for your business, while some others have a lower profit margin. Consider narrowing your offerings to focus on what you do best.

●      Focus on customers and employees: High staff turnover is detrimental to your business because recruiting and training new staff comes with a cost. Making an intentional effort to create a positive company culture and make your employees feel valued can reduce turnover and decrease costs. Recognize employees who go the extra mile, cater lunches for staff, or have company outings to promote camaraderie among your team. A happy work staff will likely create an atmosphere where customers also feel valued.

Tips to optimize your business expenses

Reduce your physical footprint.

Many businesses are operating out of spaces that were designed for a fully in-person work environment, despite having switched to a virtual or hybrid work culture. If you aren’t using your office or store space efficiently, consider downsizing or subleasing some of your space to another company.

Go digital.

If you haven’t already transitioned some of your business processes and operations to digital, maybe it’s time to consider investing in digital transformation. By streamlining workflows, going paperless, and automating your accounts payable, you can eliminate redundancies. Going digital can also make the shift to a hybrid workforce easier.

Reduce your overhead costs.

Look at your current overhead expenses and scale down fluctuating expenses like office supplies, entertainment, food, and travel. Also, look at your business subscriptions and identify the necessary ones, then eliminate the rest. Determine which overhead expenses are essential for your business and reduce any that won’t negatively impact your business if cut or adjusted according to your budget.

Negotiate with landlords and suppliers/vendors.

While looking for ways to reduce your overhead, consider negotiating your commercial lease. Unless you’re in a highly sought-after building or area, many landlords prefer to keep tenants who pay on time or who’ve been with them for some time. You can also renegotiate with suppliers and vendors, who will often give better deals during times of economic uncertainty. Some may offer more flexible payment plans or terms to help with your cash flow. Your service and technology providers might also be willing to discount your subscriptions if you’re a long-time customer.

Evaluate your marketing budget.

Audit last quarter’s marketing activities to re-examine your strategies. Look at which strategies are working and which aren’t. Where are you acquiring more customers? Which tactic is yielding the best ROI for your efforts? Cut your ad spend on poorly performing campaigns and maximize your efforts on the campaigns that deliver. You can also look at less expensive marketing channels like content marketing, social media marketing, pay-per-click, and more.

Ask your employees.

The truth is that your employees are on the front line and have unique insight into your business operations. Get input from workers about what can help maximize their skills and workflows. Allow them to voice their needs to improve operations and involve them in your cost-cutting strategies. It’s amazing what more efficient processes can do for your budget.

Risks of reducing too much

Sometimes, businesses panic during economic uncertainty and cut too much too fast. Reducing business costs should never compromise the integrity of your products or services. By cutting expenses in the wrong place or reducing too many necessary areas of your budget, you can unintentionally damage your business.

However, when executed correctly, reducing your business costs should allow for more flexibility and consistency in your cash flow—and hopefully increase your profit margin. Your long-term business strategy should be a moving target that allows you to redefine cost-cutting strategies as needed to maximize your growth.