In times of economic distress and reduction in consumer spending, businesses always look for ways to increase profits by either:
- Developing new products to stimulate more spending on the part of buyers, or
- Examining company expenses more closely and looking for ways to reduce those costs
During recessions or economic downswings, businesses are more likely to cut costs than convince customers, who are also looking for ways to save money, to spend more. It's a good opportunity to make owners think outside the box - and outside their company - to find financial answers to their current problems. If a new product or service won't help grow your company, then finding ways to cut costs just might. In this article, we'll take a look at several of these cost-saving measures for small businesses to help them survive - and even grow - during economic fluctuations. (To learn more about the impact of economic instability on businesses, see The Impact Of Recession On Businesses and Industries That Thrive On Recession.)
1. Assign the Purchase of Office Supplies
One expense area that might require scrutiny is the office supplies, which include items like staplers, pens, pencils, calculators, notepads, printing paper, ink, toner, coffee and more. Aside from simply cutting back, one way to reduce the cost of office supplies is to shop around for cheaper vendors or vendors who are willing to offer discounts. If you have a good relationship with your current vendor, consider talking to your vendor to request a discount on items you buy.
Another way to curb the office supplies expense is to put in place the following buying controls:
- Specification sheet: A specification sheet includes a price range or price criteria for items. It tells the employees in charge of purchasing what an acceptable price range is for various products.
- Approved purchase orders: Allowing employees to purchase office supplies when they feel there is a need is not good practice. Instead, assign the purchasing of office supplies to a trained employee and let the duties include taking stock of office supplies. When it is time to purchase the supplies, have that employee fill out the purchase order and make sure it is approved by an authorized employee.
2. Reassess the Inventory Costing Method
If you have inventory, the type of inventory costing method you use can affect your cost of goods sold and ultimately your profit. The two major types of inventory costing methods are first in, first out (FIFO) and last in, first out (LIFO). These methods are used for accounting purposes.
In the FIFO method, the first inventory to be purchased is the first to be sold. For example, suppose your business sells computers. You buy a computer in March for $150 and another similar one in April for $250. When you sell a computer for $500, you are going to state, for accounting purposes that the cost of the computer is $150 because it was the first one purchased. In the LIFO method, the last item bought is the first one sold. Using the previous example, when you sell the computer, your cost is going to be $250 instead of $150.
The type of inventory costing method you use becomes relevant during a period of rising costs because both methods have different effects on your profit.
FIFO results in a higher net income, because the costs you are subtracting from revenue are from a period when goods where cheaper. On the other hand, LIFO results in a lower net income because you are using higher costs to calculate profit. So, in our example, your net profit using FIFO would be $350, while your profit with LIFO would be $250. It is important to note that because of higher net income, FIFO will cause you to have higher tax payments than LIFO. Therefore, as a business owner, you will have to decide whether you would rather deal with higher net income and higher taxes or lower net income and lower taxes. (For related reading, see Inventory Valuation For Investors: FIFO And LIFO.)
3. Purchase Bundled Services
Purchasing bundled services can also be beneficial to a business owner. Sometimes, companies bundle their services in a package for a lower total price than you would receive if you purchased those services separately. Types of companies that often bundle services are communication and insurance companies. A communication company might offer you internet and phone services at a cheaper rate than you would normally receive if you purchased separate services.
4. Determine Whether to Lease or Buy
When it comes to office space and office equipment, whether to lease or buy is a question that is constantly being asked by businesses. Unfortunately, the question has no clear cut and straightforward answer because the decision has to be made based on factors specific to your business alone. (Keep reading about this in Pros And Cons of Leasing Vs Buying A Vehicle.)
Two things to consider before making the decision are cash flow and tax treatment.
- Cash Flow: In the short term, the lease option frees up cash for other purposes. In other words, you are paying less for an item than you would if you purchased it, so you have cash available for other uses.
- Tax Treatment: Leased and purchased items are eligible for different types of tax treatments. For example, an item that is leased under a fair market value or true lease may be eligible to deduct the monthly lease payments as an operating expense deduction. On the other hand, the only thing you can write off on a purchased item is its depreciation value, and this is usually based on the type of equipment.
Consult a tax expert or advisor about the tax implications of leasing or buying certain items for your business. Don't be swayed by lease offers if they really aren't in your business's best interest.
5. Implement a Last Resort?
When the economy is in a downswing, the first thing some companies do is resort to layoffs. Layoffs can be stressful to both management and employees, and this can lead to reduction in productivity. Layoffs should be a last resort for any business. Other last resort options can include slashing prices and selling equipment, supplies or products that aren't necessary to your business's operations in order to outlast - and even come out stronger after - the economic turmoil.
Before resorting to drastic last-resort measures, business owners should try to reduce the first four costs mentioned above. Assessing your company and deciding which method to use is up to the business owner. However, owners should consult with tax and financial advisors when making important decisions like these.