The goal of every business owner is to cut costs and maximize profit. By business, we mean businesses across all facets of human endeavor, including those in the computer hardware and software industry.
Considering how the pandemic has thrown a big wrench into the working of virtually all enterprises, businesses are looking for the most effective means of cutting cost, and one idea that always comes up is reducing operational cost.
Before we discuss operational costs and tips on how to reduce them without hurting your business, let’s take a second to clarify between cost control and cost reduction.
Understanding the difference between cost control and cost reduction
While it’s understandable why both terms are often misinterpreted, there is a clear-cut difference between them.
To save you all the economic and technical jargon, you can think of cost control as a technique that provides you with all the information you need to manage costs accrued to your business either directly or indirectly and whether the costs are budgeted or not.
On the other hand, cost reduction deals with the technique you can employ to cut unit costs on your products or services without compromising their quality.
We are taking our discussion further — tag along!
From our definition of cost control, you can deduce that cost control is a process that is intended to give you an overview of the total costs that go into running your business and can be gotten via competitive analysis.
You can think of cost control as a safeguard to prevent you from shooting beyond budget — not exceeding predetermined cost.
To ensure that you don’t exceed your budget for production, there are many activities to follow. They include developing a plan, evaluating the budget’s actual performance, and correcting any discrepancies in your plan.
What is cost reduction?
As we hinted earlier, cost reduction is intended to cut costs per unit product or service without compromising its quality. With cost reduction, you can easily find alternative means of reducing production costs on each product unit.
What does that mean for businesses in the computer hardware and software industry?
In the IT industry, where the demand for computer hardware and peripheral devices are on the rise, your aim as a business person is to cut unnecessary cost — production cost, storage/warehousing, and distribution.
Remember, the purpose of cost reduction is to save cost per unit production and not compromise quality. There is a highlight of the differences between cost control and cost reduction before we round upon cost reduction and cost control.
Five key steps to reduce operational cost
Regardless of your business niche, your primary goal as a business owner is to reduce operational costs minimum. What that means for business executives is that you have to come up with a clever plan to save money on production and not negatively impact the business.
If you are looking to cut costs in business, there are ways you can achieve that.
1. Automate Process
A recent study by Forrester showed that at least 22% of businesses are experiencing slow growth and less revenue because they have not achieved performance excellence and workflow automation.
Among other factors that affect business growth and productivity, workflow automation will help you ramp up revenue and boost customer satisfaction. And if you can build a large community of happy consumers, you can improve process excellence without breaking a sweat.
Business process automation (BPA) is not a Herculean take, and neither is it rocket science. It involves using technology to speed up the rate of task completion. Business automation saves you the cost of repeating specific tasks over and over again. It replaces the stress and cuts expenses and manual effort that comes with repeating tasks.
In addition to cutting cost, other benefits of business process automation are that it results in streamlined processes, it boosts customer satisfaction and increases efficiency and ensures standardized operations.
2. Consider Outsourcing
To keep up with customer demand and not lag in meeting modern trends, businesses now have to consider outsourcing as a part of their strategy to increase efficiency and promote business growth. If outsourcing plans are adequate and are thoughtfully implemented, you will be awe-struck at the tremendous drive in productivity you will experience. Outsourcing enables you to focus on other aspects of your business that is more impactful and requires more attention and inputs.
From whatever perspective you look at it, outsourcing is intended to increase profit margin, low operational costs, and labor expenditure. As profitable as outsourcing may seem, it’s advised not to outsource core aspects/activities of your business. Core activities are best handled in-house because they are your trade secrets, and you can risk having them get to the wrong hands — say, your competitors.
Besides cost-efficiency, other factors to consider while outsourcing include how it will affect your business reputation, innovation (will outsourcing help you overcome in-house restraint on innovative thinking?), and how long will it take to complete a task. Having mentioned all of that, you should always consider outsourcing a tool and ask yourself if outsourcing will help you save time and money because those are the main factors that will affect your business and promote growth.
3. Reduce Infrastructure Cost
If you are looking to keeping your business afloat in the modern business landscape and survive the stiff competition, you need to invest more in reducing infrastructure costs. One way to cut costs on infrastructure and not suffer setbacks is by adopting IT solutions. As more businesses begin to realize that it’s possible to cut down infrastructure costs and still meet customer demand with the aid technology, companies are increasingly investing towards that end.
A recent CIO magazine survey showed that small businesses spend over 6% of their revenue on IT infrastructure (outside the 6% to 6% recommended range). The survey report also revealed that medium and large businesses and an average of 4.1% and 3.2%, respectively. While spending on IT infrastructure is vital to a business’s success, you must be careful not to go overboard. It would be best if you reduced Infrastructure costs before it runs your business aground.
Typical means of reducing IT infrastructure costs include virtualization, outsourcing IT staff and services, adopting hybrid cloud technology, outsourcing security services, and consolidating systems.
4. Cut Production Costs
It’s almost impossible to discuss reducing operational costs without mentioning a reduction in production cost.
Business in the computer hardware and software industry (especially those that are into manufacturing) will appreciate the idea of cutting production cost better since they deal with procurement and conversion of raw materials into finished goods. And because production cost encompasses material cost, direct labor cost, and manufacturing overheads, you imagine how much relief you will enjoy if you can efficiently cut production costs.
The reward for business is profit, and there are two ways of maximizing profits: increasing selling price per unit and reducing costs.
A common way of reducing manufacturing costs includes keeping tabs on records. You need to pay attention to the numbers —reduce production capacity, direct labor and material costs, labor efficiency, manufacturing overhead. Having tracked figures from your records, you can reduce direct material costs and reduce carrying costs on inventory such as warehouse staff cost, stock insurance, warehouse rent, insurance, warehouse maintenance cost, and money held in stored inventory (opportunity cost).
Other ways of cutting production costs include eliminating non-value-adding processes, increasing workers’ efficiency, and leveraging automation. Once the comprehensive analysis is complete, it is much easier to know what needs to be done to improve strategic positioning. This will look different for every business but the work will pay off when a key differentiating point can be properly utilized. Specializing in solving a particular problem for a particular customer segment will be much more lucrative than trying to appeal to massive amounts of consumers.
5. Reduce Surplus Expenses
Reducing surplus expenses is an excellent way of reducing operational costs. Recall that operating cost covers all the cost incurred in the day-to-day operation and maintenance of the business. Speaking of operational expenses or operating expenses, we are talking about labor costs, employee insurance, other benefits, maintenance cost, amortization, commissions, and depreciation.
Keeping track of operating costs will give you insight into how to avoid and cut surplus expenses. Thereby improving your productivity and profitability.
Reducing surplus expenses will make you profitable and give you an edge over your competition. While reducing surplus expenses, one has to be careful not to compromise the quality of your products/services or put your employees under undue pressure. You can reduce surplus expenses by embracing technology, outsourcing, negotiating better deals, work remotely (telecommute), cancel unused services, and avoid debts.
We are rounding off
There are a thousand and one advantages of reducing your operational cost and on top of the list is that you will save enough money for other commitments.
In addition to the steps on reducing operational costs we just shared with you, other tips you should have in your checklist include renegotiating contract terms and conditions, getting alternative suppliers of materials, changing your business location, and investing in the right machinery and equipment to ensure timely production.