With the demand for necessities and luxury products falling during economic recession, it is important for managers to consider ways to reduce business costs. The overall cost reductions during a period of economic recession will help businesses to maintain profit margins.
There are many ways in which businesses can lower Total Costs (TC). Here are a few the most obvious ways to reduce business costs, including:
Lowering Variable Costs (VC), or Cost of Goods Sold (COGS):
- Making some production workers redundant, e.g. the least efficient ones.
- Temporarily reducing wages of production workers.
- Finding alternative suppliers of raw materials which can offer better prices.
- Using cheaper raw materials, or using less raw materials, as there is a growing demand for inferior goods in the economy.
- Cutting back on utility bills by more reasonable water and energy usage.
- Reducing excessive packaging, or if possible, selling goods without any packaging.
- Reducing transportation costs by using space efficiently inside delivery trucks, or working with cheaper couriers. Some of the world’s leading shipping companies include UPS, FedEx or DHL. Alternatively, requesting customers to pick up goods by themselves.Â
Lowering Fixed Costs (FC), or Expenses:
- Finding a cheaper location outside the city center to relocate the business as soon as possible.
- Renting smaller premises, or negotiating cheaper rent with the landlord.
- Reducing, or temporarily freezing, spending on promotion and advertising. Alternatively, changing from very expensive above-the-line promotion methods to free or cheap below-the-line promotion methods. Using guerilla marketing more often.
- Reducing administration fees such as spending on security, cleaning services, office supplies, etc.
In this way, after reducing business costs, cash flow will be improved as the business will now be facing lower spending, therefore lower Cash Outflows.
