Reducing your business costs is one way to improve your company’s profitability and create that little bit extra stability in an uncertain business and economic environment. While rising sales are great, if it also means rising costs, then the extra effort and commitment may turn out to be not worth it to your bottom line.

That’s not to say that going out and cutting your business costs in a ruthless manner is always the best approach. Ruthlessness can be a fantastic tool, but like all tools, it should only be wielded where appropriate. In my vast experience as a cost reduction consultant in the UK, here are three questions you should ask before reducing your business costs.

 

Is it legal?

When you want to reduce costs such as staffing, at the very least, you need to be mindful of your country’s employment laws. While it’s difficult to reduce what you pay existing staff, you can reduce your costs by paying that bit less to new staff. However, you still must pay heed to employment legislation regarding pay – these can include rules around minimum wage or similar. Also, bear in mind what the minimum allowance is for holiday entitlement and other statutory rights.

Companies such as Argos have been named and shamed (and had to make millions of pounds in back-payments) as failing to pay the required wages to their staff. While larger firms should know better, a lot of the time the problems came because of errors when processing payments, or because time spent for mandatory pre-work sessions such as briefings and compulsory searches were not included in official work time when they should have been. This meant that employees were working more hours than they were being paid for, taking them under the minimum hourly rate.

Want to stay on the right side of the law? Make sure you know what the law is, and make sure your company is applying it correctly.

To read more about the naming and shaming of companies that failed to pay minimum wage, read http://www.theweek.co.uk/87847/why-do-companies-like-argos-fail-to-pay-the-minimum-wage

Is it ethical?

While wanting to stay on the side of the law is commendable, you shouldn’t do it because you have to. Especially in the case of your staff, paying a decent wage and providing good working conditions should be something you do to foster an attractive working environment, not just because it’s a legal requirement.

A famous case in the UK has been Sports Direct. Squeezing their wage bill meant that some workers were not only not paid the minimum wage but also found themselves subject to terrible conditions, such as ‘harsh deductions’ for clocking on so much as one minute late, and having the threat of the sack over their heads constantly through getting ‘strikes’ for excessive toilet breaks, or chatting to colleagues. There are stories of children being sent to school ill because their parents daren’t take time off to care for them, and one notorious story where a worker gave birth in the warehouse toilets because she didn’t want to be punished for missing work.  See https://www.ft.com/content/0690afca-ce6f-316a-8a7c-ffd99d262353

The practices may have saved Sports Direct millions of pounds, but has cost them dear in bad publicity and ill feeling. Don’t be that company.

For more, read https://www.theguardian.com/business/2015/dec/09/how-sports-direct-effectively-pays-below-minimum-wage-pay

Is it damaging?

Failing to pay your staff minimum wage and treat them properly is damaging – not only in bad publicity and potentially reduced sales, but also in your relationship with your staff. It’s the same when reducing costs with your suppliers.

Trying to negotiate price reductions with incumbent suppliers is sometimes difficult though not impossible, and can often be a better situation than them losing your custom, or you experiencing reduced sales which will impact both you and your supplier together. However, you need to be confident that asking your supplier to look again at their prices isn’t going to cause you long-term damage.  Nevertheless don’t be afraid to have this conversation with your suppliers as no doubt they would prefer you to discuss costs in the first instance, rather than you moving to a new supplier without any discussion.

If you’re trying to reduce your expenditure on something you can easily get from elsewhere, such as electricity supply, or office stationery then shopping around is a good way of finding the same product cheaper, and the threat of moving your business elsewhere is real.

If you’re trying to reduce your business costs on something you can only get from a handful of suppliers, then it gets more difficult, and actually, screwing your supplier down on price risks creating a strained relationship. You could end up being ousted as a customer altogether, leaving you vulnerable to operational disruption.

Trying to get your stock and inventory as cheaply as possible could open you up to quality issues with expensive implications; falling sales, increased spoils and damages, and an increase in product returns.

Be mindful of the implications of the damage you could potentially cause to your company by being too quick to reduce your costs.

If you’d like expert help in reducing your business costs, please get in touch

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