A new year brings new opportunities, and our latest SME Outlook Report shows that 88% of UK entrepreneurs feel optimistic about the future of their businesses moving into 2023.
This optimism reflects the immense resilience SMEs have shown in recent years. Forced to adapt and overcome, business owners are learning from past mistakes and readying themselves to tackle future challenges head on.
In times of economic uncertainty, cash flow is key. As the UK falls further into recession, 54% of firms plan to make cutbacks in the coming months.
While reducing your company’s expenses may be necessary, it’s important to understand how to best cut costs in business before implementing any changes.
To help you get started, we’re sharing five ways you can strategically cut business costs without compromising future growth or success.
1. Address rising energy prices
Amidst the cost-of-living crisis, rising energy prices is a major concern for UK companies.
To support businesses through winter, the government’s Energy Bill Relief Scheme (EBRS) is providing discounts on gas and electricity unit rates from 1st October 2022 - 31st March 2023.
With just three months left before the EBRS scheme is due to end, now is the time to implement measures that will help to combat spiralling energy costs moving forward.
Energy Savings Trust states that UK SMEs can reduce their energy bills by up to 25% by installing energy efficiency measures and behavioural changes across their organisations.
Understanding how to reduce energy costs in business can make all the difference. Here are some tips to get you on your way:
Conduct an energy audit
A business energy audit is a great starting point to better understand how your company utilizes energy.
Typically carried out by expert auditors, these audits review company premises and operations to identify areas where energy consumption could be reduced.
Professional on-site audits can be costly, but there are cheaper alternatives available:
- Over the phone audits: An energy auditor will ask you various questions about your business’s energy usage and use the information you provide to determine measures for improvement.
- Complimentary audits: Some commercial energy suppliers offer free consultations as part of their services.
- Internal audits: Lots of small businesses opt to and conduct energy audits in-house by following a checklist.
In addition to reducing business energy costs, an audit can also help to lower your company’s carbon footprint as the UK aims to transition to net zero by 2050.
Consider multi-rate tariffs
Companies that operate at night can save money on their energy bills by using an Economy 7 tariff.
This type of metre records two rates, a discounted off-peak rate at night and a higher rate during the day.
Most energy suppliers offer their own version of Economy 7. While rates and terms vary from provider to provider, off-peak hours are defined by your business’ location and Network Operator.
How do I find out my Economy 7 hours?
Economy 7 hours vary by region in the UK. While most regions offer specific start and finish times, some regions allow up to 7 hours of energy use within longer time frames.
To find out your exact off-peak hours, refer to your metre or contact your supplier. The table provided by Switchd can be used as a general guide:
|Region||Economy 7 Times|
|London||23:00 - 07:00|
|South East||22:30 - 05:30 or 00:30 - 07:30|
|South West||NA - varies by metre|
|North Scotland||NA - varies by metre|
|South Scotland||22:00 - 08:30|
|North East||00:30 - 07:30|
|North West||00:30 - 07:30|
|Yorkshire||00:30 - 07:30|
|East Midlands||23:00 - 07:00|
|West Midlands||23:00 - 08:00|
|East of England||23:00 - 07:00|
|Wales||00:00 - 08:00|
|North Ireland||01:00 - 08:00 in winter, 02:00 - 09:00 in summer|
Get employees on board
As a small business owner, you can learn more about promoting sustainability within your business through organisations like the UK Business Climate Hub.
One way to engage your employees is to ask for their input on ways you could save money on business utility bills. Alternatively, you could offer energy efficiency workshops to encourage active participation.
To reduce energy costs in your office quickly, ask your workforce to be mindful of simple measures - turning off lights, unplugging devices and switching off equipment when not in use.
2. Review technology and software
Your business’s Information Technology (IT) systems can hugely influence overall company performance.
For this reason, it’s wise to conduct quarterly reviews to ensure your systems are running optimally.
When looking to cut business technology costs, it’s important to do so strategically to avoid compromising on functionality and productivity:
Conduct an IT audit
An IT audit can help to identify your biggest expenditures and enable proactive organization and budgeting for future updates, upgrades and expansion plans.
In addition to cutting business costs, regular monitoring and maintenance will help to boost productivity and efficiency within your SME.
Ensure existing software meets current business needs
Technology is moving faster than ever before, and keeping up-to-date with the latest trends can help your business stay agile.
Both hardware and software have a lifespan, and outdated software can slow down operations and reduce efficiency.
Regularly reviewing software can help to boost performance and ensure the systems you’re using are still relevant and beneficial.
Whether you need to consolidate systems, align applications or take advantage of emerging technologies, IT finance can help SMEs manage expensive purchase, licence and upgrade costs.
Streamline your business processes
One way to improve efficiency in your business is to simplify processes and utilize automation software for routine tasks.
Helping to streamline workflows across departments, business automation software offers huge cost saving benefits - reducing human error, boosting employee productivity and freeing up time that can be better spent on developing other areas of your company.
How can technology reduce costs in a business?
There are lots of ways technology helps to reduce business costs. As well as boosting productivity through automation, technology helps to lower stationery costs and money spent on general office supplies through digital documentation.
3. Analyse production costs
Average production costs are on the rise, but a carefully considered cost reduction strategy can help to mitigate these overheads.
36% of UK SMEs want to reduce their production costs in 2023. While blanket cuts applied at random will undoubtedly do more harm than good, strategic lowering of production costs can work to increase profits and help SMEs remain competitive over the long term.
How can a company achieve lower production costs?
Before taking steps to reduce the cost of production, it’s important to properly audit your operations and get to grips with the different direct and indirect costs your business incurs from its products or services.
A clear understanding of these expenses will help you determine which areas you should focus on reducing expenditure. In addition to utilizing software and technology, you can decrease production costs by:
Exploring lower-cost raw materials
Reviewing your supply chain
Investing in purchase and inventory management
Reducing shipping distances and travel time
Eliminating material waste
Making the most of your office space and storage facilities
4. Renegotiate with suppliers
After reviewing your supply chain, you’ll have a better picture of how your supplier deals are impacting your production costs.
43% of firms are preparing to renegotiate with their suppliers in the new year, but as all business owners know, negotiations are complex.
Negotiating lower prices with suppliers requires careful planning and clear communication to avoid losing critical business relationships, and performing a risk analysis can help to make it crystal clear what’s at stake.
The last thing you want to do is engage in a supplier negotiation that will leave your business in a worse-off position, so define your intended outcomes in advance and aim for agreements that will benefit both parties.
The steps below can be used to help formulate a supplier negotiation strategy that gets results:
Evaluate your current supplier deals
If you use multiple suppliers, establish your most important relationships and assess which suppliers you have the most wiggle room with.
When evaluating current deals, revisit your existing supplier contracts and start to jot down amendments with specific cost targets you’d like to achieve.
Understand the market and competition
The second part of your negotiation prep involves conducting market research to ensure the prices you’re paying are still competitive.
When attempting to secure lower rates, survey multiple suppliers and strategically showcase competition to give your pitch credibility.
Think about ways to incentivize your suppliers
It’s important to remember that your supplier will be coming to the negotiation with a ‘what’s in it for me?’ mentality.
With this in mind, you need to consider how you can incentivize your suppliers to agree to more favourable terms.
If your contract is coming to an end, negotiating supplier prices may be easier to achieve. However, when looking to renegotiate mid-term you will need to think about ways you can create additional value for your supplier:
Extend your contract terms
Provide references or testimonials
Award additional services
Early invoice payments
Give more of your business
Offer cash upfront (if cash flow allows)
5. Facilitate change by planning ahead
Before deciding which routes to take to cut business costs, consider how these changes will be financed without depleting your cashflow reserve.
Let’s say your supplier negotiations result in shorter payment terms, will you require invoice finance to bridge the gap between supplier and customer payments?
Or, if your company requires costly software upgrades, could a business loan help to facilitate the purchase and spread the cost into smaller monthly payments?
Without proper planning, the disadvantages of cutting costs in a business are vast. Defining the method in which you will achieve each goal in your business budget will help to provide clarity and ensure a smooth transition at each stage.
Cut costs, not quality
There are plenty of creative ways to cut costs in business, so take time to brainstorm and map out a cost reduction strategy that meets your company’s specific needs.
With opportunities for growth on the horizon, remind yourself how far your business has come and approach the year ahead with cautious confidence.
Most importantly, when thinking about different ways to cut business costs, keep quality, efficiency and long term success at the forefront of your strategic plans.
You seldom improve quality by cutting costs, but you can often cut costs by improving quality.