Cost-cutting made simple for small businesses

A terrific article from Rachel Bridge takes a look at how small businesses can cut their operating costs without neccesarily having to make permanent staff redundant…

There are some great ideas in here for the the SME owner, and for business students too!

I particularly agree with the approach of simplifying every process in a business, and taking a “clean sheet” to the overhead base. As a business grows, and its working practices become engrained in day-to-day operations, it is easy for what I call “overhead creep”. That is, the gradual increase in monthly costs associated with the way things are done - which is not necessarily the simplest way things could be done.

I suspect that many SME’s (including tutor2u!) could do with a financial makeover similiar to the personal finance makeovers that appear on ITV morning television. In these makeovers, a financial expert takes a forensic look at each payment going out of the household and asks two straightforward questions:

(1) Is this expense actually necessary (in the context of a business - does this activity “add value”)
(2) If it is necessary, could the activity be achieved for less? E.g. could an alternative supplier be found; a better rate negotiated; a simpler way of doing something found.

That said, for most SMEs, a cost base makeover may not be enough in the current downturn. Most overhead is associated with employing people. In most businesses, payroll costs are often more than 50% of the operating costs. If a substantial reduction in capacity or costs is to be achieved, then the numbers employed must fall too