15 easy ways for small businesses to cut costs and increase profits

Small business strategies to increase profits

There are 3 key small business strategies to increase profits: 

1. increase sales
2. increase your price
3. cut costs

Increasing sales is a great strategy, but it can take some time to get new customers. You can also increase sales if you convince your current customers to start buying more products. However, this too, takes time.

As a small business owner in Africa, it can be very challenging to increase your price. If you have many competitors and you are all competing on price, increasing your price can put you out of business. Because your customers may just desert you and go to your competitor. Or, your customer may reduce their buying frequency or even stop buying because they cannot afford the higher price.

Your best approach is to try to increase your sales or cut your costs. I advise you to carry out both strategies in your business.

Today, let’s look at some ways to cut costs.

Small business approach to cut costs

First of all, you need to have a clear understanding of all your business costs and expenses. This means that you are also doing good recordkeeping so that you will not overlook any expenses. My previous posts will advise you about how to do this.

How small businesses can reduce costs

There are many, many ways to reduce costs and increase profits. I have put together a list of 15 ways. Not all of them may be suitable for your business. But make sure to test as many as possible!

1. Analyse your expenses. Your first question: Is it necessary to keep all the expenses that you see? Is there any way to drop some of them? Or to reduce them? For example: if a family member can work and bring in some additional money, can you remove some family expenses from the business?
   
   
2. Pay close attention to any increase in costs. Suppose you are a retailer and you manage to increase sales by 10%. To sell more products, you will also need to buy more stock. What is your cost increase? If your expenses increase by the same 10%, it is not bad. If your expenses increase by 20%, you are losing profits. When you increase sales, try to keep the cost increase at a lower percentage. In our example, sales increase by 10%. Therefore, your cost increase should be less than 10%.
   
   
3. Set expenditure authorisation. If you have somebody handling payments and you want to control spending in a particular area, set expenditure authorisation levels. Meaning: if expenditure is higher than a certain amount, you should always approve it before payment. Make sure that you are always aware of how much money is leaving your business.
   
   
4. Use increased sales to negotiate with suppliers. If your sales are increasing, do additional negotiations with your suppliers. You are buying more from them, so let them give you an additional discount on the products! Start with the products that have the highest purchase price.
   
   
5. Monitor your suppliers and the cost of purchase. Most small businesses are already masters in this area when they go to buy something. But if you have any ongoing contract with a supplier, you need to review that contract regularly.
   
   For example: you discover another supplier is cheaper. Ask you current supplier to match the price. If not, move to the other supplier as soon as possible. This is also why you should try to avoid any contract lasting more than 12 months.
   
   
6. Ask suppliers for additional discounts. Most small business owners will always negotiate when they are buying, but there are ways to get additional discounts. If you are a regular customer, or if you are willing to guarantee a certain level of business, your supplier will be happy to give you additional discount. But you have to build up trust with your supplier first.
   
   For example: your supplier sells to you on credit and you promise to pay in one month. Make every effort to always pay a few days before the deadline. This helps to build trust.
   
   
7. Pool resources. Look for ways to pool resources with other businesses and do joint purchasing. Many African buyers do this when they go to China to buy goods. They buy for many other sellers as well. But why should this be limited to buying in China?
   
   You can use this same approach in your home town. Look for businesses that are buying from the same supplier. Discuss with them whether they are willing to get a bigger discount by pooling money to buy greater quantities. Consider office stationery, furniture, water, fuel etc. You can also consider this approach for marketing & advertising.
   
   
8. Reduce your advertising expenses. First of all, find out where your customers are? Are they spending huge amounts of time on Facebook? Then make sure you are using social media to market your business.
   
   Facebook changed their policies. This is making it harder for businesses to reach customers on Facebook. So, give your customers reasons to check your Facebook page. For example: offer discounts that are only available on Facebook. Hold regular contests. Promote your best customers on Facebook. Share videos about issues affecting your city or community that are also relevant for your business.
   
   
9. Analyse your marketing spending. Which of your marketing efforts is most effective? Continue doing that and drop the other ones. If any particular marketing effort is bringing more sales, spend as much as possible on that effort. Why? Because spending more money on this effort = more and more sales! Always focus on the marketing that brings the highest results.
   
   
10. Retain customers. Put more effort into retaining your customers. If a customer has bought from you once, they are 65% more likely to buy from you again. Also, it is cheaper to sell to an existing customer than to go look for a new customer.
    • If you are having problem retaining your customers, read this blog to find out why they are leaving.
    • If you want to know how to retain your existing customers, read this post.
    • And if you need to attract new customers, check out this advice.
      
      
11. Inventory management. Do not buy inventory unless absolutely necessary. If you have high product inventory, your money is tied down. There is also a risk that you may not be able to sell all the stock.
    
    
12. Try to reduce your rent or mortgage. Your office may be located in the best part of town, but is this also the best place for your business? Did you choose this location because it is prestigious or is it the best place to find customers?
    
    For example: if you have a consulting business, can you work from home and only rent an office or a co-working space as needed? Can you allow somebody to use a desk and chair in your office and pay you a small fee? Can you share office space with another business? For example: as a consultant, I personally always work from my home office or in my client’s office. If necessary, I have an agreement with another business to use their space for meetings or training sessions.
    
    
13. Keep money in the family. Does your business have employees? Try to cut costs by bringing in some trusted family members. Can your husband, wife, partner, or child learn some skills that you need to manage your business? For example: graphic design, online marketing, customer service, website design or even basic financial management?
    
    Having trusted family members in the business can save costs, help your business grow, and also give valuable work experience to your children. It can also be a way to start a new business venture and generate additional money.
    
    
14. Reward staff without money. If you have staff, do not give regular salary increases. Look for other ways to make your employees feel appreciated and valued. Also, only give bonuses for increased profits and improved productivity.
    
    
15. Barter or business goods and services. This is a good strategy, particularly if business is slow. It is not always necessary to pay money for business goods and services. If business is slow, look for ways to improve your business without spending huge amounts of money. Bartering can also help you build relationships with other businesses.
    
    For example: if you are a bakery, why not offer products in exchange for consulting advice or graphic design work? However, make sure to be clear about what you are exchanging for what. Maybe: 1 hour of business assessment in return for promotional materials consisting of 3 approved design of a flyer including 2 edits and 125 printed versions of that flyer to be completed within 3 weeks. Also always make sure you are dealing with somebody who is trustworthy. Check out this post to find out what to look for in a partnership.