By Guy Rigby, Director, Head of Entrepreneurs at Smith & Williamson Limited

Businesses need constant reinvention. To thrive, they must earn more, spend proportionately less, and spend wisely. In this article, we look at how you can manage your costs to improve your profitability.

Fixed costs occur irrespective of levels of business activity, so it’s essential to keep them under control. Staff and property are good examples of costs that can be fixed, whereas variable costs may include a short-term serviced office or temporary staff.

Irrespective of whether costs are fixed or variable, they need controlling. So, here are some areas you might focus on.

- Supply chain: If you manufacture or supply goods, focus on maximising profitability in your supply chain. However, cost-saving opportunities should be balanced against quality, service and reliability, so only use suppliers that will value and complement your business.

If you supply services your people are your supply chain. They are your main cost and your most important asset. Incentivise and reward them, but remember, people are motivated by more than money.

- Overheads: Most businesses have an established overhead structure, which is easy to understand but often poorly managed. Overheads might include IT costs, insurance, utilities, consumables, marketing, professional fees and a host of other expenses. But are you getting value for money?

Whatever you do, don’t ignore these and similar areas. Make sure you have proper purchasing procedures, agreed supplier terms and appropriate arrangements for authorisation.

- Expenses: Set clear expenses policies and review them regularly. Be clear about the expenses that staff can reclaim. Include rules on classes of travel, types of hotel, subsistence allowances while travelling on business as well as expenses for client entertaining.

An alternative strategy is to give staff a minor pay rise but tell them that they can’t claim expenses. This may not be appropriate for all staff but, if it’s suitable for your business, you’ll save on expenses and administration costs.

- Hidden costs: Many businesses suffer from hidden costs, which can be difficult to identify. For example, customers may complain about deliveries, raise inappropriate credit notes for spurious reasons or delay their payments. If it’s a significant customer, you may be trying to keep them on side, resulting in additional expenses and stress. At what point does this make their business unprofitable?

Has your business got any hidden costs? Have a good look and find out.

For advice on making your business more profitable, call Guy Rigby on 020 7131 8213 or email guy.rigby@smith.williamson.co.uk

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