How to Cut Business Costs

Cutting costs is a group effort.

In rough economic times, it may be necessary to cut business costs. The challenge is determining which costs to cut, and by how much. One framework for assessing costs is to analyze them at each level of the cost structure. The metric for cost reduction will be the margin associated with the cost. The four levels of costs are cost of goods sold (COGS), operating costs, interest and taxes. COGS are associated with gross margin, operating costs are reflected in operating margin, and interest and taxes are taken out of net income margin.

Instructions

1. Obtain the most recent income statement. The income statement starts with total sales or revenues and ends with net income.

2. Analyze the cost of goods sold. These are the costs directly related to making the product such as inventory and direct labor. These are also costs which vary with increases or decreases in production. The two largest drivers of the cost of goods sold are inventory costs and hourly wages.

3. Check to make sure your vendors are giving you the best deal and that all volume discounts are being honored. Improvements in these areas will increase gross profit over time.

4. Research fixed or overhead costs. These are costs which do not change when production levels change. Examples include rents, utilities, travel, maintenance, and salaries. While these costs are fixed it does not mean they are necessary. See if you can negotiate variable rate contracts for phone service or utilities. Also consider reducing travel and increasing conference calls.

References

• Entrepreneur: Effective ways of reducing business costs