• Perks: Include the cost of any company perk that is offered. Company perks include any items paid for by the company that are not required by law or as a contracted benefit, including lunches, training, and company phones and cars.
• Meal reimbursement: Include an estimate for reimbursing employees for meals when they are working late.
• Mileage reimbursement: If you regularly reimburse employees for mileage, include an estimate of the monthly amount.
• Management time and expense: If you have any managers responsible for managing your employees, include the estimate of the costs spent on each employee.
• Technology costs: Include the cost of the employee workstations, resources, software licenses, and any other technology-related expenses.
• Workers’ Compensation Insurance
Try to make this list as comprehensive as possible so that you can easily see how much each employee actually costs the company.
Although the costs of each person are now in black and white, for many business owners, this is one of the hardest areas in which to reduce costs. Loyalty to one’s employees is often a characteristic of a strong leader and the idea of reducing employee numbers or benefits is abhorrent. However, during troubled times, these decisions must be weighed against the success of the company as a whole. If the company fails to survive, none of the employees will have salary or benefits; therefore, employee costs must be reviewed as part of a reasonable expense review.
Of course, costs alone cannot drive reductions in this area. In order to ensure that you correctly reduce employee costs you will need to understand not just what every employee costs, but also what each employee does. If your organization is large, this may require the assistance of your management team. From there, review the list to determine if there are any areas in which costs can be reduced. As difficult as it may be to consider, reducing your staff overhead, perhaps by extending your own hours may help you during this initial catch-up period.
The following sections outline areas that you can concentrate on to help you reduce your business costs. If you make the changes to reduce costs in these areas, you will be able to improve your profitability faster.
4.1 Reduce perks
When a company is doing well, small-business owners often pass on some of their success to their employees. Perks such as company phones, cars, extra incentive bonuses, lunches, and other activities may become commonplace. However, when the store is in trouble, these benefits should be reviewed and many should be removed until the company is in a better financial position. The easiest way to explain these reductions to the staff is to let them know that in order to move forward, all perks and bonuses will be based on the company’s performance. Further, outline when the bonuses will return. For instance, if the company hits gross sales of “x” then there will be one staff lunch. By providing benefits that are tied to the company profitability instead of simply entitlements, your employees will be motivated to grow the business, not just take advantage of its past successes.
4.2 Reduce benefits
Many companies, when they are profitable, share wealth by offering employees more benefits. However, during difficult markets, occasionally benefits may need to be trimmed to continue to stay competitive.
Health-care plans are an area that you may want to review. Health-care coverage and premiums are constantly changing. Furthermore, regulations around health-care options are also changing dramatically. Reduce your health-care employee expenses by shopping around, comparing benefits and costs.
In some cases, small-business owners may find that it is better for their employees if the company drops their medical plan and switches to a medical reimbursement plan. Although this may sound unusual, for many this will reduce the company’s costs and improve the employees’ medical options. (For more creative health-care alternatives for Americans, read The New Health Insurance Solution, by Paul Zane Pilzer.)
4.3 Control costs of after-hour meals
If your business regularly reimburses meals to employees who are working late, control costs by organizing evening meals. Ordering off one menu reduces delivery charges, and may encourage a group to share meals (e.g., pizza or subs) to further reduce costs. Also, in order to reduce the costs of individual drinks, keep soda and other refreshments in stock.
4.4 Find a solution for excessive overtime
Overtime can be very expensive for small business owners. Employees paid on an hourly basis are entitled to time-and-a-half for overtime work and sometimes even meal reimbursements. If one or two employees are regularly completing an excessive amount of overtime, it may be cost-effective to add an additional employee part time, rather than pay the additional overtime expenses.
4.5 Deal with weak employees
Some employees may have less to do during a troubled market. As a result, these employees may still be getting paid full-time salaries even though they may no longer be earning them. To resolve this, you may want to consider changing their hours or increasing their workload. Until the volume increases, it may be possible to switch some of these employees to part time during this lull. If possible, you may even want to lay off the weakest performers and add additional new staff members when the company’s profitability increases.
4.6 Review employee expenses
In some organizations in which there is little management oversight on employee expenses, employees may take advantage of the system to obtain reimbursements for entertainment and expenses not related to your business. By checking all reimbursements yourself, or at least making a policy of spot-checking reimbursements, you may be able to reduce unnecessary expenses. Remember the responsibility of ensuring that all the expense information is submitted should be part of an employee’s responsibility before reimbursements are paid. If you do not have enough information to approve the charges (e.g., a 100-mile gas reimbursement without paperwork documenting the distance to the customer), return the paperwork to the employee and ask for more information.
Lifesaver: If your employees often travel more than 20 miles to your customers, your service may not be as profitable as it may appear. Factoring in mileage reimbursements and hourly employee costs may drop your margin lower than you realize. To counterbalance these expenses, charge your clients a trip fee. This will reduce expenses and may even become a profitable charge for your business.
5. Eliminate Hidden Marketing and Advertising Costs
Marketing and advertising is one of the most critical components to a small business. This could include newspaper and magazine ads, free promotions, public relations, client meals, and any other expense that is designed to draw customers and retain clients. Examples could include free beverages provided to browsing customers, holiday baskets for clients, or promotional giveaways imprinted with the company logo. Each of these items has a cost, but the revenue these items generate should offset these costs. Ideally, your marketing and advertising should bring in more revenue than it costs, but at the very least, you should break even.
Unfortunately, many small-business owners often want to cut their marketing and advertising as soon as times get tight. While this may seem like a good idea because it immediately frees up cash and reduces expenses, it may not be the best course of action for a company that is trying to grow. If you are trying to rebuild a business, you will need to invest your time and sometimes your money in advertising and marketing. Further, the customers you bring in with these tools, presuming they have