Cost reduction strategy examples: sustainable practices for long-term savings
July 21, 2023
December 28, 2023
Reducing business costs while maintaining efficiency and sustainability is crucial for long-term success. With some of the cost reduction strategy examples outlined below, organizations can improve their bottom line without sacrificing other areas. The right cost-cutting measures, ranging from traditional to innovative techniques, can help prioritize where to spend money while safeguarding workers’ well-being.
From avoiding wasteful practices to optimizing technology, simple and practical actions can yield significant savings. Moreover, innovative processes such as eco-friendly initiatives, AI, and automation can also lead to long-term success.
As an employee-centric organization, we know that companies need to strike a balance between reducing expenses and maintaining employee well-being as well as satisfaction. Read on to learn about money-saving strategies in depth and how to implement them successfully. We have also included a cost reduction plan template that outlines specific actions to guide businesses in their cost-saving endeavors.
What are the major cost reduction strategy examples to focus on?
The main areas of cost reduction strategy examples
There are a number of cost reduction strategies to help improve your business's bottom line. Some are easier to implement than others, but all have a positive impact, whether big or small.
A great place to start is avoiding wasteful practices where possible. For example, becoming a paperless office reduces resource wastage. Making commuting to the office optional saves employees from transportation costs which can, in turn, save the business money if that is something they subsidize. Both of these practices also have other benefits, such as bringing more sustainability to the office.
Another area of cost reduction is HR and the idea of keeping a close eye on employees and the hiring process. For example, hiring freelancers is cheaper than having full-time employees. Depending on the task, freelancers can be hired on a project-by-project basis and be paid for that one service. Also, try to detect underperforming employees, as they could hurt your bottom line. First, check in with them to create an improvement plan, and then if all else fails, it might be time to find a better fit for the position.
Additionally, cost reduction can be a product of updating workplace technology and renegotiating the prices of certain services or products. Try and consolidate your technology subscriptions into one more integrated software, for example.
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Traditional cost-saving techniques
When reducing business costs, the best place to start is to employ simple and traditional cost-saving techniques. These are three tried and tested methods that are a great jumping-off point for your organization.
- Keep your budget plan up-to-date
This ensures that you understand where money is being spent, allowing you to find areas to save costs. The more up-to-date the numbers are, the better prepared you are to evaluate company-wide spending.
- Outline your company’s financial expenditures
Company’s financial expenditures include costs like insurance, electricity, internet, maintenance, and subscriptions. Evaluate if all of these are needed or if you can reduce electricity usage, for example, or do not need a certain subscription anymore.
- Set up a budget system by department
Planning a budget system for each department can also be extremely helpful, as each one has varying costs based on its requirements and activities. So, instead of creating an overall budget, formulate one that is personalized by team, as some spend more than others.
Innovative cost reduction ideas
After implementing the traditional techniques, it is time to branch out and try something new. Get creative and innovative with your ideas to align with a modern business's demands.
First, making your office more sustainable positively impacts your bottom line, as many sustainable practices mean less consumption of resources. Switching to low-energy solutions helps avoid using energy unnecessarily. Moreover, powering an office, from lighting to electricity, can be costly. So finding a way to reduce this can be helpful.
Another solution is to decrease the need for business travel. Planes, for example, are one of the most polluting and costly modes of transportation. So by cutting down on this, you save money and the planet!
Second, looking at cost savings through the lens of AI and automation is another innovative way. It can increase efficiency on certain tasks, reduce the need for additional employees, and keep existing employees productive.
Finally, the modern world of work would not be complete without hybrid work models, which have many cost-saving benefits, such as being able to downsize office space.
💡These innovative cost-saving ideas will take your cost-reduction strategy to the next level!
What should you prioritize when willing to cut costs?
Avoid cost-cutting measures impacting employee well-being and satisfaction
When cutting costs, some investments are crucial for the success of your business.Yet, not one is more important than the well-being of your employees. Your workforce is the backbone of your company. If they are unsatisfied or unhappy, the organization will suffer.
Workers' dissatisfaction has a number of negative consequences that can incur the business with additional expenses. High turnover is a good example of this. If your team is quitting at high rates, you are not only losing money when they are not working but also incurring extra costs to source, hire, and onboard a replacement.
Furthermore, an unhappy workforce is disengaged, meaning they are not loyal and are not performing to the best of their abilities. This hinders productivity, efficiency, and ultimately profitability.
Analyze the current situation of your operational and productive costs first
When evaluating costs, look at the operational and productive costs on the one hand. Operating costs are defined as those incurred by operating and maintaining the business on a daily basis. And the term can be broken down into costs of goods sold (COGS) and administrative (SG&A) expenses. This can include rent, equipment, marketing, and payroll.
On the other hand, production costs come from the actual production of the product. A good example of this would be manufacturing costs, including labor, tools, and equipment.
Both of these should be straightforward to collect and should be prioritized because they are essential for the business's functioning. Without being able to operate or produce a product, the business simply cannot exist.
Create a strategy based on prioritization
Once these priorities are in order and the current financial situation has been analyzed and understood, finance managers can outline where money is being spent and where savings can be made. It is crucial to understand the main sources of money loss and improve upon these areas.
For example, in hybrid models, here is likely quite a bit of unused office space. This is a money pit, as rent and energy costs are increasing. But to know if office space is being left unused, research needs to be done to understand the actual space utilization and occupancy. Once this data is collected, the organization can choose to downsize their space and save a great deal of money.
It is important to note that if there aren’t any stand-out areas of improvement, focus on implementing cutting-cost measures in all areas. We will explain how to do this using the Kaisen costing technique, which will be explained at the end of this article.
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How to get successful results with your cost-cutting measures?
Review ALL your expenses
To ensure successful results when implementing new cost-cutting strategies, don’t focus on only one department but analyze all of them. This determines the ones that cost the most and, therefore, where expenses can be reduced. Granted, some departments naturally need a larger budget than others, but keeping in mind who is spending what is key.
It is also important to look at all areas of cost, from the operational and production expenses mentioned earlier to the money spent on renting and hiring new employees. Many of these expenditures are hidden, such as hiring and onboarding new talent. While there is not a great monetary cost to doing so, other than paying your HR and recruiting team, there are opportunity costs. For every day that role is not filled, the work is not being done, which is costing the company overall.
Use technology and data
Using the right technology can help gather data efficiently to allow you to make educated decisions about your budget. Streamlining the data-gathering process allows strategies to be executed more quickly. You can then have greater faith in the decisions being made because technology leaves little room for error. Before starting your cost-reduction strategy, use technology to help measure spending, resource, and space utilization and to assist in calculations.
Let’s take the example of the unused office space mentioned earlier. A hot desking app will allow you to measure who comes into the office, when, and which parts are used most frequently. This can guide your downsizing efforts and allow you to make these decisions confidently.
When analyzing this data, be sure to do it over a period of time, such as pre and post-implementation of the cost-reduction strategy, to see if there was a positive impact or improvement.
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Elaborate a cost reduction plan (template)
Organization when developing such a strategy is key. So start by creating a clear cost reduction plan for your team. This plan should outline where the business can improve and the specific actions to take to achieve greater efficiency.
We have some ideas of what to include when developing this plan, which can serve as a template for businesses of any size.
First, you want to include focus areas. These are categories where you think your business can save, such as operational costs. Next, you want to define your objectives under each focus area. So, if you want to reduce operational costs, look at lowering energy consumption. Additionally, you should have a measurable KPI to track your progress toward reaching these objectives. And finally, create projects or specific actions to take in order to work towards these KPIs.
Use the Kaizen costing technique
The Kazien costing technique is a great way to ensure success. As promised, let’s quickly dive into how it works. Kaizen costing is a process that businesses use to minimize costs while maintaining product quality. Its goal is to improve production while keeping costs low for the greatest efficiency.
The fundamental aspects of this technique are employee involvement and continuous improvement. This means it prioritizes communication and guarantees the organization is in a constant state of evaluation to make sure that both efficiency and cost savings are being optimized. This differs from other budgeting methods, which evaluate the yearly or quarterly budget.
It has a number of advantages, including maintaining the product's quality and not forcing any abrupt, major changes at once. Instead, it is a more gradual process that is easier to adopt.
Implementing these cost reduction strategies examples is vital for businesses looking to thrive in a world where rent and energy prices are rising. Organizations can achieve long-term savings and improved efficiency by utilizing a blend of traditional and innovative cost-cutting measures. However, it is imperative to prioritize employee well-being and satisfaction to avoid job dissatisfaction, poor company culture, and high turnover rates. All of which can harm your bottom line. Exploring different methods, such as the Kaizen costing technique or trying out a hot desking app for your hybrid office, ensures the success of your strategy. By following our outlined examples and guidelines, businesses can achieve financial stability and sustained growth.
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