What are the best cost reduction strategies a small business can implement without hurting the business and its people? What are the best cash flow management strategies? Do you want to learn how to run a business on a lean budget? Then i advice you read on.
One of the most tedious; yet most important tasks in business is cash flow management. Constant in flow of cash is very vital to business survival but will be meaningless without proper utilization and channeling. Poor cash flow management is a major reason why most businesses fail; even with a winning product and business team.
“Cash flow is the life blood of business.” – Robert Kiyosaki
Every now and then, you will hear of businesses taking drastic measures such as downsizing; just to cut down costs. Now reducing the operating cost of your business is a very simple task; yet, it’s extremely difficult because it takes discipline to achieve.
“The most important word in the world of money is cash flow. The second most important word is leverage.” – Rich Dad
So in this article, I will be sharing with you some inside tips on how to reduce your operating costs, run your business on a lean budget and still grow fast. If you are an entrepreneur starting out with low capital or you are seeking ways to preserve investors’ money and make the best use of it; then this article is for you. But before I go into the details, I want to point out the fact that reducing costs or running a business on a lean budget will never be possible without the three factors below:
- Thorough understanding of the business
- Your team’s commitment towards your plan
Having said that, below are practical ways you can reduce your business expenses and operate on a lean budget.
Cost Reduction Strategies: How to Run a Successful Business on a Lean Budget
1. Avoid Marketing/Advertising whose results can’t be measured
Marketing and advertising are some of the leaks through which money flows out of a business. Now don’t get me wrong, both of them are important to generate sales but they should be done tactically. You are a start-up company and you don’t have the million dollar marketing budget of the big corporations, so what do you do?
Well, you simply apply marketing tactics that puts you directly in the face of your targeted market; note the keyword “targeted market.” Therefore, avoid marketing/advertising methods whose results can’t be quantified or measured. Effective marketing must reflect in the books; it must yield the corresponding desired results (increase in sales, lead generations, increased traffic/visitors/customers) and must be quantifiable (percentage change, ratio).
Avoid advertising agencies, Pr firms and social media ad companies except you have millions of dollars to toy around with. Avoid advertising techniques you don’t understand or have not mastered; stick to what you know. And best of all, try to make the most of free publicity; such as press releases, getting on TV and radio shows and contributing content to news sources. Most importantly, if you are going to use a paid advertising medium, make sure you first educate yourself about the intricacies of the medium; it will save you a lot of cash in the long run.
2. Avoid Expensive Office Spaces or Leases
“I could have an office all to myself but since my collaborators don’t have one, then I too am contented to have a desk in a shared room.” – Ingvar Kamprad
One of the expenses that take a large chunk of capital/resources is office space and most entrepreneurs waste investors money by situating their businesses in glorified high rise buildings; just to satisfy their ego. If you are a start-up company or you are running on a lean budget, then you don’t need an expensive office spaces. You can go for shared office spaces or better still, work from home and make use of a virtual office address. After all, Amazon, Ford Motors and Apple were started from the garage; you shouldn’t be an exception. Start small.
3. Avoid Technology or Software that doesn’t improve Efficiency
“The tone is in the fingers……..not the instrument.” – Jason Fried
I have a friend who has a dream to become a black belt in martial arts. This friend of mine is so committed to his dream that he has invested heavily in buying several kits, books and video tutorials on sparring techniques. He knows all the fighting styles and terminologies off hand; yet, never will you see this friend of mine sweating out in the Dojan (training ground). He would rather watch videos and read books than train. Is this friend ever going to become a black belt? The answer is no.
The same applies to business and unfortunately, most entrepreneurs are just like this friend of mine. They live with the illusion that a new technology, business software or tool will make them better entrepreneurs and push their profits to the sky. But improved technology or the latest software/tool will be useless if you are not prepared to put in the required efforts. An expensive golf club did not make Tiger Woods a star; a super computer did not make Bill Gates the richest man in the world, their skills did. So don’t waste your resources pursuing technology, if it’s not going to add to the bottom line of your business. Rather, work on improving your business skills and boosting the morale of your employees.
4. Don’t Overstaff or hire incompetent people emotionally
“If you own a butcher shop, don’t hire vegetarians.” – Rich Dad
Most entrepreneurs tend to over staff their company; based on the illusion that more numbers of employees will lead to increased productivity. Others tend to hire incompetent people emotionally. Don’t do any of the above. Having a large staff doesn’t signify success; neither does it increase your company’s output. Remember, it’s easier to increase your number of employees but difficult to shrink. Small businesses hope and strive to be big while big businesses wish they were smaller in size because being small gives room for flexibility. So don’t overstretch your workforce; hire slow and fire fast still remains a golden rule in business.
5. Avoid Office equipment that don’t add to the bottom line
I have seen entrepreneurs keep a computer on their desk that they don’t even know how to use. I recall a time when I wanted to put a television set in my office; I had the urge to go for a 21 inch plasma but I sat back and asked myself: why do I need a television in my office? Why do I need a 21 inch wall plasma? Well, I figured out that I needed a television set to stay current with happenings but my desire to buy a 21 inch plasma was simply that of ego. A normal 14 inch will serve the same purpose, so I shoved the idea of buying a plasma TV and went for a normal 14 inch television. Buy necessities, not wants. If an equipment won’t add to your bottom line; don’t buy it.
6. Avoid hosting your business meetings in high brow buildings
Well, having a business meeting in an environment that’s conducive is important but you must avoid expensive places. I sometimes meet with my business team in fast food joints or restaurants; other times, we meet in my office or the hall of my church or even a public recreation centre provided it is quiet. These places are conducive and almost free; we only get to pay for a meal, that’s only if we need it. I think you can adopt this strategy too to save cost.
7. Watch the decisions you take; it may cost you a fortune
“I have made tough decisions, always with an eye on the bottom line. Perhaps it’s time America was run like a business.” – Donald Trump
For every decision you take in life or business, there will always be consequences resulting from such decision; either positive or negative, so be careful of the decisions you take. I have seen businesses suffer massive setback and loss just because the entrepreneur or manager took a decision that backfired. So weigh every decision you are about to take while keeping an eye on the possible outcome; it will save you from monumental losses.
8. Concentrate on your core; outsource the rest
What is your core business operation? One of the mistakes small businesses and start-ups make is trying to do everything effectively. Business, just like the human body, is made up of systems and all systems must work effectively for a business to be successful. To be successful, a business must handle human resource, payroll, sales, marketing, product development, production management, customer relationship, accounting and so on.
Now instead of taking up all these tasks and increase your overhead; you can choose to concentrate on your core task and outsource the rest. Some business tasks you can outsource include employee recruitment, human resource management, product manufacturing and packaging, payroll, etc.
9. Avoid luxury and unnecessary expenses
“Simple routine have a greater impact. It is not just to cut costs that we avoid luxury hotels. We do not need fancy cars, posh titles, tailor made uniforms or other status symbols.” – Ingvar Kamprad
Avoiding luxury is a good way to cut down on your business expenses. By avoiding things such as private or chartered jets, five star hotels, corporate cars, frivolous parties, being chauffeured in limousines, etc; you can save a tremendous amount of cash for your business.
10. Avoid taking on too much inventory
If you are running on a limited budget; then you should avoid tying down cash as inventory. Rather, try to produce on demand or work out a systematic time-based production.
Now these are ten common ways you can reduce your operating cost, run lean and still build a successful business. In addition to the above, below are an extra eleven unconventional ways to run a profitable business on a lean budget.
Cost Reduction Strategies: 11 Unconventional ways to run a business on a lean budget
a. Work for free first; then put yourself on a decent salary
Working “in” and “on” your business for free is a good way to make some extra cash available for your business but unfortunately, most entrepreneurs wouldn’t want to hear of it. Everyone wants to get paid for doing a task and that’s why most people shy away from starting a business.
Most start-up entrepreneurs sometimes set aside ridiculous salary for themselves even when their businesses is yet to turned out a dime in profit; but things don’t work that way. Building a business requires commitment and sacrifices especially in the start-up phase; so therefore, you should be prepared to work for free.
Now if you must know; every successful entrepreneur today has at one time or the other worked on their business without receiving a dime. I have also worked for free and I still work for free today in some of my new businesses. It’s not absurd to work without getting paid; rather, it’s something you should get used to as an entrepreneur. When your business begins to turn in some revenues or even profit; then you can place yourself on a decent salary. Remember, your aim for building a business is not to earn a steady paycheck. I want to believe you are in it for the bigger picture; which is building a multi-million dollar asset.
b. Don’t expand vertically; grow horizontally
Most managers and entrepreneurs love the idea of growing vertically because it makes the business look big from the outside; and they do this by creating more job positions and employing more people. While this may look good from the outside and earn you some prestige; remember that growing vertically will increase your overhead and make your business more cumbersome.
Rather than growing vertically, I will advice small businesses grow horizontally through strategic partnerships and alliances. Do you want to expand into another industry or you want to grow in terms of scale? Instead of increasing your overhead by taking new employees, all in the name of growth; it is better you forge a partnership with an existing business that handles such task or serve such industry. This will help you save some cash and even reduce your growth risk.
c. Encourage your customers/clients to pay before service
This tactic is simple, yet most entrepreneurs ignore it. You can offer your clients/customers incentives and value added services to entice them to make advance payment for goods and services. This will help your business with cash inflows.
d. Avoid expensive business meals
I believe the message here is clear; avoid meals that cost an arm. Good food doesn’t have to be expensive.
e. Spend on budget and stick to it
I am a stickler for forecasting and budgeting; both in business and in my personal life. I don’t wake up and spend money just for the sake of spending; I spend on a budget. Everything I buy, every cash note that leaves my pocket today has been budgeted for months back. Even if I am going to spend some free cash, it has been budgeted for as miscellaneous; I have never had free cash at hand that’s unaccounted for and I don’t intend to. I tend to look at my cash needs at present and use it as leverage to forecast my future needs; this singe act has helped my business avoid a cash crisis. You should do the same; operate on a budget and stick to it.
f. Balance your acts with family and friends
“People say I am cheap, and I don’t mind if they do.” – Ingvar Kamprad
The issue of family and friends is something I handle cautiously. Family is family and business is business; I don’t mix both and this is a principle I live by. Now family and friends are a very important part of your life; so also is business. To be a true success, you have to balance your act between these three elements.
Family and friends are close to you; meaning, you can’t hide your success from them. Secondly, you tend to be soft towards them because of their close relationship with you. Well, it’s okay to be soft with them but when it comes to financial matters; you’ve got to be tough with them.
Most people see entrepreneurs as money bags; they see your company growing fast, with you working round the clock to ensure a smooth business operation and then they will think you are made. What they don’t understand is that there’s a big difference between revenue and profit. They won’t understand that a business can generate revenue without profits. This is when you need to tighten up on your finances. Now I am not asking you not to give your family money; all I am asking is that you do it with cautiousness. I have had friends complaining that I am too strict when it comes to spending; well, why shouldn’t I be. After all, I worked hard for my money while they slept; so I can’t afford to waste resources on unprofitable things. I think I have ranted enough for you to get my point. Open your mouth and wallet cautiously…………………enough said.
g. Be a tough negotiator
You are running a business on a limited budget; this means you don’t have the resources for trial and error, and there’s no room for wastage. You can’t also afford to leave money on the table, so you have to be a mean and tough negotiator. Now I am not asking you to be a penny pincher; I am asking you to be a tough negotiator and get the best out of every deal you make.
“If you want to buy something; it’s obviously in your best interest to convince the seller that what he’s got isn’t worth very much.” – Donald Trump
h. Cut down you energy consumption
Another way to cut down your expenses is to cut down on your power consumption; this will directly reduce your bills. You can do this by using energy saving appliances and switching off appliances that are not in use. Now for those who generate their own power supply like me, you can further cut down your energy cost by switching between alternative power supplies and generator.
i. Establish a credit line with your suppliers
Now by establishing a credit line with your suppliers, while encouraging your customer to make advance payments for goods and services; you will be creating a pool of extra cash that can be diverted to very short term tasks.
j. Avoid litigation; it cost money
This is as simple as ABC; avoid litigation, it’s a huge waste of time and resources. The only people that get rich from litigation with certainty are attorneys or lawyers. Engage in litigation only when your business survival depends on it or you have a substantial case to prove with a success to failure ratio of 80:20.
k. Keep your eyes open; to avoid larceny and waste
“Waste of resources is a mortal sin at IKEA.” – Ingvar Kamprad
One thing I have observed in business is that employees don’t attach value to business materials and equipment; because they aren’t the ones that bought them. They tend to discard business items that can still be used or managed. Secondly, employees tend to take lousy decisions most of the time; if you allow them. After all, they have nothing to lose should their decision backfire; they will simply blame somebody else and still get their paycheck at the end of the month.
Thirdly, employees will steal from you; consciously or unconsciously. Things employees steal from business premises include pens, notepads, toiletries, etc; and if they are left unchecked, they will even steal your time by engaging in unproductive activities during work hours like chatting with friends for long hours, wasting your company’s time and bandwidth on social media. To run lean and still be successful, you have to successfully guard against the three things listed above.
As a final note, I think the above 21 steps is more than enough to help you grow your business on a lean budget. Remember, it takes discipline and action to achieve success in any endeavor. I rest my pen.