Managing costs is typically a top priority for SME owners, but is cutting expenses that don’t contribute to your bottom line always the right approach?
In 2016, Telegraph.co.uk ran a story stating that the average UK start-up spends £22,756 in its first year on costs relating to incorporation, legal, accounting, HR and general administration; these are the costs to get started. The figure excludes money spent on business-specific activities to maintain its operation because what it takes to run a business varies wildly from company to company. Taking inflation into consideration, the amounts spent by SMEs to get started and to maintain the business are likely to have increased since 2016.
At Tax Agility, our chartered accountants for small business in London have been working relentlessly with clients on how to best manage expenses and take control of business costs. In this article, we aim to discuss the different types of costs and share seven useful tips that can help you become more efficient in managing costs.
What are costs?
In business, the amount you spend that is related to the operation is known as costs. Costs can assume various forms including but not limited to:
- Fixed costs – these stay the same even if output changes
- Variable costs – these change according to the output produced or sold
- Semi-fixed or semi-variable costs – these change when there is a significant change in output
- Sunk costs – money invested which cannot be recovered
- Opportunity costs – the difference between a chosen action versus one that is foregone
- Avoidable costs – items that are not necessary
Putting those technical terms aside, business owners usually see costs associating with equipment, office rent, furniture, office supply, utilities, payroll, inventory, insurance, website (with or without eCommerce), marketing and subsidies (travel & meals), among others. Each of these costs is classified as fixed, variable, semi-fixed/semi-variable and sunk.
To get a good understanding on costs, it is often necessary to perform a cost analysis, an exercise that helps to attribute your expenses to the services you provide or the goods you sell. The aim of cost analysis is to empower you to make well-informed decisions, from how to set prices, know which services are more profitable than others and how to better control expenses in areas that have a lower margin, to name but a few. If you’d like to know more about how cost analysis can benefit you, contact one of our accountants today on 020 8108 0090.
Now, let’s take a look at a few common ways in which you can use to manage your business costs:
Monitor supplier costs
When talking about costs, every aspect of the resources used to produce goods or render services is always worth examining. The first thing most business owners should do is to monitor supplier costs and there are three ways to lower them.
The first is to ask for discounts or discuss what other value-adds they can give, particularly if you have always paid your bills promptly or are ready to sign a multi-year contract with them.
The second is to find other businesses who can share the supplier costs with you. For example, if you run a design agency and you are about to book an exhibition stand, consider partnering with a web consultant and share the costs.
The third option is to investigate a cheaper alternative without compromising on quality. The lowest cost is not always the best value for money, but like you, suppliers also respond to changes in the business market and there are suppliers who can strike a deal with you.
Better time management
William Penn, the founder of the Province of Pennsylvania in 1681 once said that “Time is what we want most, but what we use worst” – a quote that resonates deeply with many business owners who see themselves juggling multiple tasks simultaneously, including tasks that don’t contribute to the bottom line.
Knowing what to prioritise, when to let go, and how to delegate are valuable lessons which can help to restore balance and allow you to focus on things that are of the utmost importance.
One time-management technique that is widely used by entrepreneurs is to allocate a limited period for each task and block out all distractions while you are focusing on the specific task. Outsourcing is another proven approach to help combat costs and you can get some inspiration from our post “Hiring specialist contractors can reduce SME costs”.
Use space more effectively
An advantage of owning and running a small business is that you can be highly creative when it comes to office space and lower your rent and utilities. For example, if your current office is big because it needs to accommodate piles of documents that don’t require constant access, consider digitising them or putting them in storage as the cost of storage is usually cheaper.
Many entrepreneurs also opt to be home-based or use co-working spaces. Co-working spaces definitely deserve special mention as you get to meet freelancers and other business owners working on a wide variety of projects, which often leads to valuable partnerships.
Switch to the cloud
Forget about expensive servers and rigid hard drives that take up space, require dedicated maintenance and consume much power; reduce your IT and energy costs by switching to the cloud instead.
Cloud computing allows you to set-up a virtual office which in turn enables you and your team members to share files and communicate from different locations. It is also scalable – with Google Drive, for example, you can opt for 100GB, 200GB, 2TB and 10TB or more depending on your business needs.
If you’re looking for a good cloud accounting software, we’d recommend Xero; you can follow this link if you’d like to know more about Xero and how it can help to organise your business account and finance.
Make the most of software and apps
Apart from switching to cloud computing, there is a world of disruptive technology at your fingertips too. One tangible advantage that many SMEs can see is using peer-to-peer services like TransferWise to cut bank charges and achieve a better exchange rate when you need to transfer money abroad.
When it comes to meetings, focus on the substance of the conversation and let the AI-powered app Otter help you with note-taking – this app can transcribe voice conversations into rich notes with text, audio and images; it even has a function which allows you to search for key phrases. When it comes to boosting business efficiency, let project management software like Slack or Trello help you and your team to collaborate better and minimise downtime, thereby lowering your overhead costs.
Focus on quality
Improving quality is a tried and tested approach that leads to lower costs among manufacturers and it makes sense; fewer errors on the assembly lines means less wastage and increased output, which in turn attracts more customers and lowers the risk of lost business, negative public relations or even litigation.
Should business owners who provide professional services care about quality too? Absolutely, because quality is often a crucial differentiator in a crowded market. With competitions abound, you can’t just meet your customers’ expectation; you need to exceed it. The way quality can help to lower your cost, we will argue, is through customer retention as it is a known fact that you will spend more money to acquire new customers than to retain the existing ones.
Increase tax efficiency
The UK tax system can be complicated, especially if you have your hands full managing various areas of your business. To keep abreast of the latest tax incentives or meet HMRC deadlines, rely on our expert chartered accountants instead. With us handling your tax responsibilities, you can put your energy into increasing your profits and growing your business.
Accountants can help you control your costs
Our small business accountants in London are here to help you minimise tax and maximise efficiency. With our accounting advice, you can save yourself time and money – and put your business first. All businesses are unique, and so are our specialised services. If you would like to arrange a one-to-one meeting to discuss your business and any tax queries you might have, we offer a no-obligation, free consultation.
Contact us today on 020 8108 0090 or get in touch with us via our Contact Page.
This article was first published in 2016 and has been updated on 31/07/19.
If you found this helpful, take a look at:
- Why your business should be accepting card payments
- Accounting and bookkeeping for small business
- Five ways to improve your company’s cash flow
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.