How to prepare for cost optimization?
Optimizing company costs is a process that should begin with an analysis of expenses. It is not enough to guess that any one area is consuming too many resources. Even if this judgment is correct, without a fair and thorough analysis, we may end up overlooking elements that are even more resource-intensive.
It is worth emphasizing at this point that cost reduction in a company is a risky process – badly carried out it can be counterproductive.
One of the cardinal mistakes companies make in terms of cost optimization is setting unrealistic goals. In an effort to meet management’s expectations, those responsible for implementing optimization efforts can get caught up and cut budgets in key areas of the company’s operations, slowing down their efforts and ultimately torpedoing optimization attempts.
So what to look for when planning cost optimization?
Cost structure
First of all, it is necessary to analyze the cost structure in the company – this will be the starting point for further actions. It will also be good to study margin levels (1.., 2. and 3rd degree).
Profit analysis
The next step, which will make cost optimization, more likely to succeed, should be an analysis of profits – check which areas in the company generate the least of them in relation to the costs incurred. By the way, it is also worth verifying which elements produce the highest profits in proportion to costs – this will help answer the question: what after optimization? How about investing in the development of these very areas?
Contracts and suppliers
Next, it is worth looking at the existing contracts – a thorough analysis of the terms on which they were concluded and a comparison with the current market situation (including the offer of competing suppliers) opens up the field for renegotiation of contracts. If there is a lack of openness on this subject on the part of contractors, it is worth considering terminating some contracts and entering into new ones on preferential terms.
Opportunities and risks
In theory, any area in a company can be subjected to cost reduction – but often the potential risk is too great. If you decide to cut expenses to look for savings on production materials, it may affect the final quality of the product. If your customers value quality, they will stop buying or start voicing their dissatisfaction loudly. As a result of such optimization, the company may lose, instead of making it easier to attract new customers. In turn, these losses can be both financial and reputational. In view of this, is it worth optimizing costs? Yes, but such an important stage of preparation should not be overlooked in the process.
New technologies
When planning optimization activities, it is impossible to ignore the issue of technology development. Only by knowing where the greatest potential lies will you be able to seize opportunities and improve your company’s finances.
7 ways to optimize costs in your company
Ways to reduce the cost of operating a business are plentiful, but which ones will be appropriate for your company at any given time will only become apparent during the analysis. Here are some ideas to review. Consider them as a starting point – this is where cost optimization in your company can begin.
1. opt for process automation
The introduction of computer programs and robots that monitor some of the processes and are also able to execute them (once programmed) can significantly reduce costs, but also minimize the risk of error and increase process efficiency. An example of such optimization could be the implementation of a robot that tracks shipments or monitors order processing steps.
2. take a look at the assortment and inventory management processes
The Retail Barometer report, provided by Future Mind, proclaims that the highest return on optimization investments entrepreneurs record is from improved assortment management. Issues of warehousing, delivery, replenishment usually leave a lot of room for optimization. However, it should be taken into account that attempts to cut costs will initially… generate new costs. In the long run, however, they will save a lot.
3. negotiate with suppliers
Negotiation is one of the basics of doing business. Skillful discussions with suppliers can result in significant cost reductions. Even if you manage to negotiate a small price reduction, this small change multiplied by the number of suppliers will make a big difference. Of course, don’t set yourself up for every supplier to be eager to make concessions – much depends on how strong your company’s position is in the relationship, and the individual arrangements between the entities.
4. take advantage of outsourcing
Not everything in the company has to take place on site. Using outside companies is the norm, and can often significantly affect costs. The smallest companies use an accounting firm instead of maintaining their own accounting department. Likewise, your company can outsource supplies, production and even recruiting. Although outsourcing costs money, the final tally can be favorable.
5. reduce fixed costs
Leasing and renting are very popular among entrepreneurs for good reason. Small and medium-sized companies rather rarely have the need to own cars, machinery and buildings on their own. The use of renting and leasing provides companies with flexibility and the ability to adapt quickly to changing conditions. This was brilliantly demonstrated by the coronavirus pandemic in 2020 – office buildings were deserted, and companies that owned buildings on property still had to maintain real estate.
6 Enter electronic workflow
Giving up traditional documentation is not only saving paper and toner in printers, but a powerful organizational change. It can result in, among other things. putting documents in order. This way, employees won’t lose so much time cataloging. Above all, however, you will make it easier for them to find information – once in place, the system will significantly speed up work with company documents.
7. try to reduce the occupied office space
In the era of hybrid work, reducing office space has become an important trend. Many offices that were previously bustling with activity are now receiving only part of the team. Proper organization of office space (e.g., determining the days on which certain teams occupy the office) will make it possible to give up part of the office, and thus clearly reduce costs. The difference will be particularly noticeable for companies occupying several floors in office buildings. Giving up one or two floors is a massive savings for the company.
What benefits does cost optimization bring to a company?
Cost optimization in a company – if done correctly – will naturally result in lower operating costs for the company. The money saved can be used for a wide variety of purposes, the scale of which depends only on how effective the optimization has been. What is worth thinking about first?
Invest in development
You can use the money you save to further develop your business. New equipment, replacing computers in the office with more powerful models, expanding the fleet of vehicles, upgrading the production line – the possibilities are limited only by funds.
Reinvesting funds raised through optimization is an activity with some risk, but without investment in development it is difficult to be competitive.
Make sure to upgrade your skills
One of the most important assets of a company is the people in it. Use the funds from cost optimization to send employees to training and improve their professional skills. By doing so, you will increase their efficiency – the value of highly skilled employees cannot be overestimated.
This is particularly relevant in the age of artificial intelligence. Although there is a lot of talk about using AI solutions in businesses, there is still a shortage of specialists who can address this and take advantage of the powerful potential inherent in language models.
Hire new people
Opening a new position is always an opportunity for a company, but it comes at a cost – and it’s getting higher. There is a lot of talk about the fact that the cost of hiring an employee is rising extremely fast. A brief comparison will suffice:
- In the second half of 2023, the minimum wage was PLN 3,600 gross. This translated into PLN 4,391.28 in employer costs
- in 2025, the so-called “lowest national wage” is PLN 4,666, which means that for each employee hired on a contract of employment, the employer will pay PLN 5,621.59. We have not included PPK in this amount.
In 1.5 years, the cost of employment has increased by PLN 1230.31. This amount increases even more when the employee earns more than the minimum wage.
With cost optimization done correctly, there will be no need to seek additional funds to expand the team with another specialist.
Invest in advertising
Online advertising is a mainstay and an opportunity to increase business, but launching it also comes at a cost – often a high one. Extra zlotys for advertising can, if well spent, increase the visibility of your product, service or brand.
Advertising rates are steadily increasing, which means that additional funds from optimization can be a powerful boost to your company’s marketing.
Create a financial cushion
If your company does not yet have a reserve of funds, it is worth budgeting for its creation. The money that cost optimization will bring to the company is worth using for this very purpose. Evaluate for yourself the risks facing your company’s industry. Remember, however, that something unforeseen can always happen, and setting aside funds for a “black hour” is often a good idea.
Summary
The ways mentioned above are just suggestions – practical advice that you can use when trying to optimize your business costs. Finally, I would like to leave you with the most important advice. The process of optimizing costs in a company should be constant or at least repeated periodically. It is worthwhile to analyze your finances from time to time. This way you will react quickly enough when some area of the company’s operation needs immediate optimization.
