The importance of managing costs in challenging times

In today’s challenging economic climate the profitability of businesses large and small is under pressure, with sluggish revenue growth but ever-increasing costs squeezing profit margins continually. While there may not be a lot that businesses can do to change their revenues in the short term, one thing that they may have more control over than they might think is their overheads.

We recently reviewed overheads for a client and found cost savings of over $50K. How?

It’s critical now more than ever that business owners have a good handle on their costs and are continually seeking ways to achieve better value for money, and while many business owners believe that they watch every dollar they spend, a fresh perspective can quickly highlight the potential savings.

Here are just a few ways that you could reduce your overheads and greatly improve the profitability of your business:

Expenses that you had forgotten you even had

Many people have gym memberships that they never use, but the monthly payments have been coming out of their bank accounts by direct debit for years. It’s almost like people have forgotten that they were paying for a gym membership, or that it’s just too hard (or too painful) to face up to cancelling it.

While payments for gym memberships may seem small in isolation, the cumulative effect of these monthly payments can be significant, so it’s important to identify the equivalent of gym memberships that exist within your business and critically assess whether these costs are delivering value to you. Try listing out your regular monthly commitments – you may be surprised by how much cash is leaving your bank account without you even knowing it!

Once you have a list of these expenses it makes it far easier to identify those that are a low priority and can be cancelled or scaled back.

Expenses that you could reduce or avoid with a different approach

In the same way that gym memberships can be draining your bank account, irrelevant or obsolete expenses can do the same, and all that you need to do to avoid these costs is to identify a different approach.

The classic example is the landline telephone, which was once required to obtain access to broadband internet but is now largely unnecessary. Many parts of the country (sadly not many regional areas however) actually provide “Naked DSL” internet, which does not require a landline at all, however many people still hold on to their landline despite carrying their mobiles with them everywhere they go. And when the NBN finally arrives in regional areas, it will be a realistic option for many people to do away with their landline once and for all.

While the classic landline connection is only an example, many businesses will find that they have an equivalent expense that could be avoided with a different approach, and they could be missing out on thousands of dollars in savings by making some simple changes.

Expenses that are well outside the benchmarks for your industry

If you’ve ever wondered whether your business’s financial results are “normal” for your industry, there’s a way to find out – by comparing to benchmarking studies that have been completed for all types of businesses in Australia. While “normal” is a label that depends on your point of view, benchmarking studies can help you find out how your business stacks up in a whole range of areas, including key overheads such as cost of goods sold and labour costs.

By reviewing relevant benchmarking studies, you can usually get an understanding of the level of key expenses (e.g. wages) relative to revenue for your industry, and this should in turn tell you whether you are overstaffed for your level of activity (or overspending in any number of other areas).

How can Crowe Horwath assist?

Crowe Horwath recently reviewed overheads for a client and identified cost savings of over $50,000 per annum without any significant effect on the operations of the business.

With Crowe Horwath’s exposure to the whole range of industries in our economy, our advisers have the knowledge to advise how you can reduce your overheads and make your business more profitable, regardless of the industry in which you operate.

Contact your Crowe Horwath adviser today to see how you can manage your overheads and boost your profitability immediately.