Cost-Cutting 101: Defining Cost Reduction [Featuring 27 Examples]
If you want to ensure that your organization and business can remain profitable and cost-efficient, cost-cutting is often a necessary aspect of the equation. Cost-cutting, also known as cost reduction, is the practice of finding ways to reduce expenses without negatively impacting the quality of a product or service. There are many reasons why cost reduction programs are implemented, including economic downturns, cost-of-living increases, and a need to remain competitive.
If you’re in a management position, you’ll need plenty of attention to detail and intimate knowledge of your organization’s internal workings to properly execute cost reduction strategies. However, the larger your company becomes, the more complicated it can be to implement cost-effective ways to achieve your organizational and career goals.
In this article, we’ll take you through everything you need to know about cost reduction and tips to implement better cost-cutting strategies for companies.
What is Cost Reduction?
Cost reduction, as mentioned above, is the process of reducing costs from a business’s balance sheet without compromising on quality. Cost-cutting strategies typically involve eliminating redundancies, streamlining processes, and finding cost-effective alternatives.
The most effective cost-reduction strategies usually involve a combination of cost-savings measures, such as reviewing current contracts, outsourcing certain services to cost-effective providers, and using cost-efficient technology. In practice, this can be done through IT cost reduction, negotiating for better raw materials costs, looking for better-priced labor, and more.
There are several potential reasons why a company might want to implement cost reduction initiatives, such as the following:
- Increasing profitability. By reducing costs, a company can increase the profitability of its products or services, which can improve the bottom line, fund new initiatives, or even increase dividend payouts.
- Improving competitiveness. In a competitive market, companies may need to reduce their costs to gain an edge against rival companies and be able to offer better prices to their customers.
- Enhancing cash flow. A cost reduction strategy can free up more cash, which can be used to invest in new projects or opportunities or to pay off liabilities.
- Responding to changing market conditions. If a company faces declining sales, increased competition, or unforeseen economic impacts, reducing costs may be necessary to remain viable.
- Improving sustainability. Lowering costs can also help a company to become more sustainable by minimizing its environmental impact, conserving resources, and supporting green initiatives.
Cost reduction is the overall process of minimizing waste and looking for cost-saving opportunities so the company can free up resources for other initiatives.
Types of cost savings
There are multiple ways that companies can implement strategic cost reduction for their operations. Key decision-makers need to learn the various types of cost savings they can implement to craft a plan that fits the needs of their organization.
Cost reduction strategies are deeply intertwined with organizational processes and various departments, so managers need to be aware of the impact of the cost reduction methods that they will implement. Here are the various ways that companies can cut costs.
Raw materials or supplies
One of the first ways that organizations can look to save costs is to get fewer or cheaper materials. This is particularly important for factories or organizations that manufacture something as a product.
Organizations can minimize expenses by finding ways to obtain raw materials for less, such as by negotiating better prices with suppliers or by switching to less expensive materials.
Organizations can also reduce their labor costs. Reducing labor costs will lessen the salaries that need to be paid, which is a significant part of operating costs.
This can be done by finding ways to increase efficiency, such as by implementing new technologies or trying out shorter processes. It can also involve reducing the amount of time and effort to complete certain tasks, streamlining time records, and setting limits on overtime.
Overhead costs are expenses that are not directly related to the production of goods or services, such as rent, utilities, IT, and administrative expenses. Organizations and companies can reduce their overhead costs by finding ways to reduce these expenses. The methods mostly depend on specific conditions, but decision-makers can explore ways such as implementing IT cost reduction strategies, negotiating lower rent, or finding more efficient energy-efficient ways.
Process and manufacturing waste
Inefficient methods and systems can lead to waste, which could have translated to better savings with better management.
This is why cost reduction examples also include reducing waste, such as finding ways to use materials more efficiently or reducing the amount of waste produced during the process. This can help bring down the cost of waste disposal and can also help to conserve resources.
You can also reduce costs by finding ways to borrow money at a lower interest rate. Organizations can refinance existing debts or find more favorable lending terms. This can help to reduce interest expenses and improve the company’s cash flow.
27 Ways How To Reduce Costs In The Workplace
Now that you understand the importance of cost-cutting and recognize the multiple ways it can be executed, let’s talk about hands-on applications and determine the best ways to implement cost-cutting measures in the workplace.
🔧 Choose proven and established tools
Cost-cutting can be an extremely complex undertaking, so one of the best cost-cutting examples is to choose tools that are sure to work in your favor.
Digital and software tools are one of the best things you can use in this regard; they are convenient, automated, and feature-rich. You can use various tools to measure, analyze, and calculate figures to have better information when planning your cost-cutting strategy.
A good example of a useful tool is the Everhour time tracker, which you can use when measuring or controlling labor costs. Accurate time tracking helps decision-makers calculate necessary hour cut-offs, wage adjustments, overtime limits, and more.
Everhour can help by providing detailed reports and tracking the cost of each employee. This work time tracking platform also has built-in organizational hierarchies, which means managers can access overviews of employee work and overtime hours for reporting.
🤷♀️ Identify and remove duplicate processes
Analyzing your organization for processes that could be eliminated is one of the best cost-saving projects that you can implement. Examine whether the business has several departments or locations which are conducting comparable tasks that you can merge.
Finding and removing duplication can be an efficient strategy to save expenses without affecting an organization’s overall productivity. Consolidating its staff might also result in cost savings for communications and transportation.
👩💻 Invest in new technology
Although onboarding new technology for your various processes might incur greater initial costs, it will ultimately result in cost improvement when done right. The information age brought about a plethora of new tools and technologies that can be used in almost every aspect of the company.
Automation can save the company money on manual labor costs, and specialized SaaS technologies can support corporate operations while preserving process quality. A good example of this is having a work hours tracker or using automated hiring platforms for recruitment.
Just ensure that the desired technology fits well with the organization’s capabilities and long-term goals before making any commitments.
💹 Reexamine your marketing operations
Advertising on network television and in newspapers may be more expensive today, especially with social media and word-of-mouth marketing tools.
Consider looking at various alternatives to conventional marketing and advertising strategies, such as social media influencers, customer loyalty programs, or incentives for attracting new customers. You might find that you can cut a company’s marketing spending while maintaining its current sales leads.
👷♀️ Reevaluate raw material prices
If your company uses raw materials or sources some parts critical for its operation, reconsider whether or not you can get a better deal for those materials. You need to leverage your negotiation and self-advocacy skills to find solutions that will help your side without sacrificing their profits. Reassessing your raw material prices is one of the best cost reduction initiatives examples you can conduct.
To do this, consider talking to your suppliers and see what they can do to minimize your expenses. If they won’t budge on price, then think about negotiating for non-monetary benefits, such as on-demand delivery instead of scheduled drop-offs (where you might accumulate excess) or specialized portions specifically suited for your needs.
On the other hand, consider switching suppliers, especially if you can find one with lower prices and similar quality or a partner more willing to accommodate your needs.
🤑 Cut back on discretionary spending
Traditional discretionary spendings, such as advertising, travel, and entertainment expenses, should always be one of the first to consider when a company is looking for cost-saving opportunities.
Discretionary spending is not always necessary, especially when you need the budget for more critical aspects of the company.
🟩 Implement Lean Manufacturing techniques
Lean techniques are designed to help companies streamline their operations and reduce waste, which can be an excellent cost-reduction program.
These techniques focus on identifying and eliminating waste in all forms, including overproduction, excess inventory, unnecessary transportation, waiting time, defects, overprocessing, and unnecessary motion.
By implementing lean techniques, you can reduce the time and resources wasted on non-value-added activities and instead focus on aspects of manufacturing that directly contribute to the production of high-quality goods and services. This can lead to faster and more efficient operations, lower costs and increased profitability.
💸 Watch out for small costs
Effective cost-cutting techniques include more than just large, drastic measures. Small costs made repeatedly can also add up to a significant amount.
For example, your organization could be paying for periodicals that no one reads, or consuming too much paper where electronic documents would now suffice. There may be an excess of snacks, water delivery, etc.
Small costs can creep up on you. Examine your budget and pay close attention to tiny expenses that add up to a significant amount over the year. You could inspire staff members to come up with their own cost-cutting concepts, which would likely improve morale.
🤔 Rethink your large office space
Large office buildings cost a lot of money to maintain, as you will need to pay more in terms of utilities, equipment, etc. Recent workspace trends, however, might be making those expenses unnecessary.
You might be able to reduce or even get rid of your office space if its workers can work in different shifts, remotely, whether on a full-time vs part-time basis. That doesn’t mean you don’t need to prepare, though. Make sure you have the infrastructure in place, such as internal message services and videoconferencing platforms, to ensure successful remote work before implementing.
🕵️♀️ Take advantage of the gig economy
If your company’s workload varies by a lot, it might make more sense to hire more contract and freelance workers than a small number of permanent employees.
This cost-saving strategy might not be effective for every firm, but it could assist the organization in cutting expenditures related to perks, packages, and full-time pay. It can even make you more productive since you will have specialized workers who are only responsible for that specific task.
📩 Offshore or outsource specific business functions
Outsourcing is one of the best cost-reducing techniques that you can implement to save your company money. Outsourcing takes advantage of lower labor costs in other countries or regions. By outsourcing certain functions, such as manufacturing or customer service, to a lower-cost location, your company can simultaneously reduce labor costs and increase profitability.
Additionally, outsourcing can also help you reduce overhead costs, such as physical facility maintenance and employee benefits, and even access specialized expertise or capabilities that you can’t find in-house.
🍏 Go green in your office
Investing in energy-efficient equipment is a cut-cost strategy that works best in the long run. Like investing in new software and tools, going green can cost a lot upfront, but will always result in greater long-term savings – make sure you factor that into your calculations.
You can make your company more energy efficient in multiple ways, such as by using energy-efficient appliances, ensuring proper building insulation, and instituting no-waste policies.
🥈 Source second-hand equipment
If your business needs plenty of equipment, you can also find cost-savings opportunities there. Consider purchasing a used item for replacing workplace technology, such as a car or an office printer. Used equipment typically costs less than new equipment.
Specifically, if the business doesn’t frequently employ the cutting-edge capabilities of newer models, the quality of a used item could be just as excellent as a new one.
🧳 Minimize travel expenses
Business trips can be expensive. How bring down costs, you ask? Examples can include booking in advance, using discount codes, and choosing the lowest fare class. Businesses can also lower costs by reducing or even eliminating employee travel for conferences, meetings, or site visits. Make sure the suggested travels are required before permitting business travel and consider ways to cut expenditures.
🔎 Be flexible with R&D initiatives
The R&D department will usually contribute to the long-term value of your company. However, if you need to make immediate savings, you could choose to implement resource cost reduction on your research finances temporarily.
Alternatively, you can also make a more flexible budgeting plan for this department so that they are not adversely affected by sudden budget cuts.
📦 Reduce physical and digital inventory
Temporarily or permanently cutting both your physical and digital inventory are cost-reducing strategies that could do wonders for storage costs.
Reevaluate your physical inventory plans, and pay close attention to things like records, research, and actual manufactured products in your warehouse. On the digital side, consider restructuring your digital archives and auditing any long-term digital storage that you might have.
📃 Evaluate the need for paper documents
Going paperless is a big undertaking, but it’s one of the most impactful cost-saving projects you can implement.
This might entail various things, such as shifting to digital documents rather than printing them out or using cloud-based email services like Gmail or Microsoft Outlook. There are also additional alternatives for scanning papers into PDF format and transmitting them via email or other channels for situations that require hard copies.
Paper waste is one of the most prevalent wastes that a company can conduct. Minimizing paper use in the day-to-day running of your company will not only bring you savings but also minimize environmental impact and enhance efficiency and security.
🏦 Be aware of government incentives
Several government incentives make it cheaper and easier for you to maintain efficient “green” systems, such as solar power and environmentally conscious insulation.
In the US, solar power systems can qualify you for state tax credits (depending on where you are), rebates on solar panel purchase and installation, net metering, Solar Renewable Energy Credits, performance-based incentives, and tax breaks. There are also various incentives that you can apply when it comes to properly insulating your office.
📄 Conduct a utility bill audit
Your utility bill comprises some of the biggest chunks of your overall monthly overheads. If you’re still wondering how to bring down costs, taking a closer look at your utility bill is one of the best things that you can do.
Pay particular attention to heating and cooling costs in your office; everyone might be using more electricity than they need to. You can also implement policies or tools to track usage across all locations or devices to better grasp what you can cut and what you need to preserve.
✋ Stop paying for useless subscriptions
Conduct a thorough assessment of software or service subscriptions that your organization is paying for, and then compare that with its relative impact on the company. Is it being utilized to its full capacity? Does it bring a positive impact on your operations? Is it still worth the subscription?
It’s easy to miss monthly subscriptions, especially if you’re not personally using them every day. That said, it’s crucial to track these regular expenses as they can easily become expensive over time.
🧼 Reconsider your cleaning services
Just like unused subscriptions, it’s easy to overlook the amount that you’re paying for your cleaning services. After all, it’s something that you pay for exactly because you don’t want to think about it.
Are you getting your money’s worth off of their services? Could there be other partners that charge lower while maintaining the same quality? Evaluating the value they bring just beyond the money can reveal cost reduction solutions, such as making internal arrangements or using more efficient cleaning materials to lessen costs.
🏢 Invest in your workspace
It might sound counterintuitive to spend a lot more money by investing in your workplace, but it can lead to savings in the long term.
One cost-saving technique related to this is going green, which was already discussed above. Another is using better software to prevent frequent costly upgrades. However, it also includes strategies like buying high-quality tables, ergonomic chairs for employees, trash cans, and even water dispensers or vending machines.
This may seem like a costly endeavor, but making your workspace a more comfortable place to work allows your employees to be more productive, reduces waste, shortens their time to complete tasks, and brings more revenue in the long run.
🙅♀️ Sell underperforming assets
Selling underperforming assets is another cost-saving strategy that has plenty of benefits. By removing underperforming assets, the company can reduce its overhead costs, such as the cost of maintaining and storing the equipment, location, or staff. This can help the company save money in the long run by reducing its expenses.
Your company can also use the proceeds from the sale of the asset to pay off debt or other liabilities, which can reduce the amount of interest the company has to pay.
You can also use the money from the sale to invest in more profitable ventures or projects, increasing its revenue and profitability.
📉 End unprofitable client contracts
Unprofitable clients usually fly under the radar because managers simply tend to think of them as paying customers and just leave it at that. However, over time, you might have client contracts that are no longer profitable or favorable to continue. Rethinking those contracts is one of the most cost-effective ways to lower expenses.
By ending unprofitable contracts, the company can free up the resources previously dedicated to less profitable clients. Examples include staff or equipment, which can be used more efficiently elsewhere within the company or for a more profitable client.
🛑 Discontinuing a product
One of the cost-saving strategies that can help your company save money is discontinuing underperforming products.
Evaluate your product lines to see if there are products that cost more to produce than they return in sales. It’s useful to factor in brand loyalty in this consideration: older products may be contributing brand equity even if they aren’t as profitable as newer items.
🚧 Delay IT upgrades
IT cost reduction techniques like optimizing current tech instead of purchasing new ones can be ideal when you need to cut down expenses. In other words, delaying IT upgrades can be a viable strategy sometimes, especially if other cost-cutting measures have already been put into place.
If and when you decide to update, you could buy software that can carry out several tasks or replace paper-based operations, aiming for maximum efficiency. Plus, if you really need to replace hardware, make sure you go for reliable brands, as they can help you delay hardware upgrades in the long run as well.
🤝 Create marketing partnerships
There are innovative cost-reduction techniques that you can implement if you want to be more efficient in running your various organizational operations. One of these is your marketing operations.
Cost reduction techniques such as partnering with other small or nearby businesses, sharing marketing and advertising costs with complementary businesses, or utilizing user-generated content is a cost-effective way that you can market your brand.
Figuring Out the Best Ways to Cut Costs in Your Workplace
Workplace expense reduction is a natural process that companies will have to go through at one point or another. Cost-saving measures might be implemented because of external pressures or internal initiatives requiring more resources than the current cash flow can muster. In any case, key decision-makers need to be careful about the cost-cutting measures they implement.
This article talked about the best ways to cut costs within your company. Among all the tips mentioned here, one of the easiest-to-implement solutions is to use a time-tracking platform like Everhour.
Everhour will allow you and your team or department to monitor workplace data and cross-reference it to resources such as budget allocations. It features a comprehensive list of time tracking and administrative features you can implement for your cost-cutting initiatives.