The costs of running a company are often hidden, but can be substantial. Cutting these costs is as effective as cutting the direct variable costs of labor and materials. Unlike manufacturing costs, most administrative costs are “fixed,” in that they rarely vary from month-to-month, even though revenues go up or down.
Figuring out how to reduce or eliminate specific administrative costs is essential to the profitability and long-term success of your company. Trimming these expenses will decrease the revenues necessary to break even or make a profit, provide greater flexibility in long-term pricing strategy, and improve cash flow.
How to Cut Administrative Expenses
1. Don’t Purchase – Rent
The decision whether to own or rent property is generally based upon your scale of operations. Ownership or long-term leases increase your fixed costs and financial exposure. While month-to-month rental agreements tend to cost a little more in the short-term, the ability to end the agreement and relocate to a more suitable space saves money and liability in the long run. In a fluctuating market, a wiser decision might be to limit your financial exposure, saving your cash for that time when you’re more comfortable with the market opportunities and an investment that will meet your criteria.
2. Limit Travel and Entertainment Expenses
Client relations is always important and should never be compromised. However, the value of face-to-face meetings is not a function of lavish gifts and expensive dinners at luxury restaurants. Establish an entertainment policy which fits the economy; your clients and prospects will understand since their company is probably implementing similar policies.
Technology effectively reduces distance, so there is no need to require administrative people or specialists to be physically located together. Employees who work from home or in month-to-month temporary facilities reduce or eliminate the high cost of office space, as well as the demand for support services. In many cases, employees with the opportunity to telecommute will take less salary due to the freedom and lack of commuting costs.
4. Sublease Office and Yard
If you have excess space that will not be used for a year or more, investigate subleasing. As a landlord, you will continue to control the premises and the activities performed in the space, and you’ll have extra income to offset the expense of your own facilities.
Before agreeing to a sublet, you should be confident that the space will not be needed during the term of the agreement. Include language in the contract for early termination if it becomes necessary. Your ability to reoccupy the space provides maximum flexibility, and can be reflected in the agreement by either reducing the tenant’s rent during the term of the agreement or paying a penalty if termination becomes necessary.
5. Refinance Debt
Interest rates are unusually low at this time. If you have any long-term debt on equipment, machinery, or real estate, now is the time to refinance with the goal of reducing payments as much as possible for the near term. In hard times, cash is king, so you want to keep as much as possible close at hand for emergencies.
6. Eliminate Subscriptions and Memberships
Over time, many companies add subscriptions and memberships due to their industry and the small expense involved for a single affiliation. These expenses can rapidly build up and go unnoticed, however, as they often appear on different schedules and expense reports.
Review all your social, fraternal, and business affiliations to ensure they are necessary and contribute regularly to the profitable operation of your company. Eliminate those which do not.
7. Cut Travel Costs
Where possible, eliminate travel, replacing the trips with phone calls, emails, and video meetings. If you must fly, plan ahead to avoid the high costs of a “sudden” trip. Increase the scrutiny of your expense accounts to send a clear message to your staff that costs are important.
When you travel, stay in business hotels, rather than luxury hotels, as they are often half the cost of a four-star facility. And everyone who travels should be members of the affinity group sponsored by that hotel to gain discounts and free nights.
Furthermore, focus your car rental on a single supplier with whom you’ve negotiated a bargain rate – specify standard models except in approved instances. If staying in a larger city, consider the use of taxis instead of renting a car. Discontinue private limousine services unless they’re comparable to taxi rates.
8. Eliminate Paper
Managing paper is time-consuming and expensive. Sorting, filing, and finding files requires secretarial/clerical time and space. Purchase a scanner and digitize all important papers and keep them in well-organized electronic files to save space and administrative costs. Your company’s books and records are critical to your continued operation, so it is important to maintain and secure copies of the electronic files within your facility and in a remote location.
It should go without saying that files need to be backed up every day, especially any files regarding your customers’ identification, financial records, or contact information.
9. Share Marketing Expenses
Identify products or services which complement your product. Then, contact the company that provides the products and negotiate a mutual marketing arrangement. For example, a swimming pool contractor might agree to joint marketing with a supplier of outdoor furniture, or multiple ethnic restaurants could promote an “International Food Experience” featuring each restaurant on a different night. This strategy expands your marketing effort without incurring the expense that would normally be associated with adding new salesmen or advertising.
10. Maintain Equipment In-House
If repair and maintenance is a significant cost in your operations, consider hiring a mechanic or specialist and bring the repair in-house. You will have better, regularly maintained equipment that may allow you to avoid expensive replacements until later.
11. Use Airline Miles for Travel, Hotels, and Autos
If you or your employees fly regularly, target a single airline with a good travel rewards program for company use. Also sign up for one of the best small business credit cards, and as the points or miles build up, use the awards for company business.
12. Monitor Tools and Supplies
Consumables are an invisible asset that is often overlooked. Since no item is expensive by itself, employees often misplace them, leave them, or take them home for personal use.
Initiate a consumables policy – keep office supplies in a secure area, available only through a designated employee. If you have a plant where hand tools or other pricy consumables are used, initiate a similar policy. Assign tools to individuals with the requirement that they are personally responsible for the cost of the tool if it’s lost or missing.
13. Leverage the Internet
Everyone involved in the purchase of materials or supplies should have access to the Internet and know how to search the data for specific items. Establish a maximum cost per item with a policy that requires anyone purchasing items in excess of that value to use the Internet to identify potential suppliers and the lowest cost.
Administrative cost-cutting requires the cooperation and participation of your employees. Encourage their participation and ideas when you begin the exercise and keep them informed of the results.
Business consultants generally agree that most companies can cut administrative expenses up to 10% without affecting their efficiency. As you implement the strategies to cut business costs, monitor their effects to ensure that customer relations are not adversely affected, nor that costs increase in non-administrative areas a result of the cuts. When the changes in administrative operations have been completed, transition the “cost-cutting” phase of the exercise into a “cost control” phase to ensure the improvements become embedded in the day-to-day business of the company.
What other ways can you suggest to trim administrative costs?