Five hacks to reduce the cost of doing business

When a client begins working with We Grow Businesses Ltd, a Hertfordshire-based small business consultancy, Director Francis Hooke is happy for them to do a basic cost-cutting exercise to find all of the low-hanging fruit in terms of business expenses.

Then, the truly powerful work begins. It often involves data analysis that shows with great clarity where the business is making money and where it is leaking potential profit.

“If the goal is high levels of profitability, then costs are obviously a part of that,” Hooke says. “But cost is just one side of the coin.”

“The other side of the coin is revenue. When you’re thinking about improving business performance, you’ve got to look at both cost and revenue, and quite often the two are deeply related.”

Here are five of Hooke’s top tips to cutting costs and, at the same time, boosting income in this challenging economic climate.

Have an accounting system in place

"This is a very basic thing for me to say to an audience of accountants,” Hooke says. “But to really see what’s going on in your business, to keep your finger on the pulse, cloud accounting systems allow for very easy review of vital data.”

Having instant access to real-time data relating to their business, particularly about profit and loss, helps guide conversations and decisions around cost cutting and revenue boosting.

And recording time spent on projects for each client helps identify areas of wastage and opportunity.

Trim low-hanging fruit

To cut costs, it is worth reviewing telecommunications, utilities, insurance and subscription services. Profit and loss figures can be used to identify where money leaves the business for such purposes.

“This comes with a big health warning,” Hooke says. “People can expend a lot of time trying to shop around to save a few quid here and there.”

“What I would argue is even if you’re overpaying a little bit on telecoms, for example, maybe by a few pounds a month, your time is more likely to be more valuably spent on improving the revenue side of your business.

“So, be careful about the false economy of trying to shave off a few quid.”

Is it better to spend half a day shopping around for mobile phone contracts to save ten pounds per month, to organise meetings with lapsed clients, or business development sessions with current clients?

“Which levers are going to have the biggest impact?” Hooke says. “The telecom bill may not move the needle significantly.”

Make the most of tax breaks

Businesses can take advantage of tax breaks in consultation with an accountant.

“It is worth looking into things like gross pension contributions for small business owners,” Hooke says.

“Of course, there is the possibility that taxation rules are going to change around this in the near term, because of the change of government. But while tax breaks exist on pension contributions and in other areas, it remains a very tax-efficient way of saving corporation tax and sending money to your pension.”

Similarly, for businesses in sectors that attract grants, such as manufacturing, it can be worth investigating what is available. But once again, Hooke says, don’t spend too much time on this if there is not a good chance of an outcome.

Analyse labour and client service efficiency

The biggest cost in most small businesses is staff. It’s vital that businesses receive a good return on their investment in this area, Hooke says.

“You have to get a really solid multiple on your staff,” he says. “You need to be in a position where you’re hitting two, three, and sometimes even four times multiple on what you’re paying them.”

What are staff doing during a regular day? How do they spend their time? Most importantly, is their time billable to a specific client?

“Staff need to be in a situation where when they’re delivering work for their clients, you’re charging those clients in full for the work they’re doing,” Hooke says.

“A classic trap accountancy practices fall into is over-servicing clients. The client might have signed up for some basic services, but then they ask for help with something extra. The accounting business gives a bit of extra time here and there, and it all adds up. It can really hamper your efficiency.”

Compare invoices and time tracked

In relation to the above idea, one very simple and enormously powerful exercise is to compare on a spreadsheet the total amount invoiced for each client compared to the time spent servicing that client, or how much your business is spending on them.

Staff time has an hourly, billable value. If on a monthly, quarterly or annual basis, one client is invoiced £12,000, and the value of time spent on that client is £10,000, that is a good, profitable client. However, if the client has been invoiced £12,000, and the value of time spent on that client is £16,000, that clearly indicates a serious problem.

“By blending the data relating to how much you invoice the client and how much time you give the client, you often find a very patchy picture,” Hooke says.

“You’ll find some clients are profitable, while others are causing you to haemorrhage time. That’s when you realise you need a conversation with the client about reducing time spent on extra requests, or raising their fees.”

Cost control lays foundations for growth

As soon as a business is in control of its costs, growth becomes possible, Hooke says.

“Small businesses need three things,” he says. “They need to win work, which is about marketing and selling. They need to deliver on time and to budget. And they have to generate the right level of profitability, which should result in money in the bank.”

Hooke says achieving this trifecta supports business growth, but only once costs and revenue are under control.