Reducing and managing your business costs should not require a lot of effort or time, as it often involves making smarter decisions and implementing efficient methods.

Starting your own business from the ground up takes plenty of guts, determination and self-motivation, which are qualities that our experienced accountants at Berley respect and share. We also know that the process of building and running a business, although exciting, can be challenging at times – in fact, one of the greatest challenges small business owners face is managing rising business costs.

At Berley, our small business accountants have years of experience in working with small businesses across London to reduce and manage their business costs. In this article, we aim to share the different types of business costs and our most helpful tips that can assist you with gaining control of your finances.

Defining business costs

Business costs refer to all the costs incurred when carrying out the operations of a business. There are several types of business costs, which can include:

• Variable costs: These change in accordance with changes in production, such as wages of labour and raw material.
• Fixed costs: These do not change and remain the same regardless of the level of output, like the salaries of employees and rent.
• Semi-fixed or semi-variable costs: Costs that change when there is a significant change in output.
• Sunk costs: Costs that have already been incurred and cannot be recovered.
• Direct cost: These costs are assigned to the production of certain goods and services, including material, power and fuel.
• Indirect costs: Costs that cannot be directly attributed to the production of goods and services. General maintenance and administrative expenses are good examples.

For most small business owners, knowing what you spend every month on costs (office rent, equipment, utilities, payroll, marketing, to name but a few) is critical to your success. The reason is simple – if you spend more than your business can afford, your business is likely to suffer. With this in mind, let us now look at five effective and proactive methods you can use to manage your business costs.

Controlling hidden costs

As a small business owner, you can expect to see the immediate effect of most costs, like if you do not pay rent, your landlord will call and you risk being evicted.

Hidden costs, as the name suggest, are not apparent. The danger of hidden costs is most business owners tend to ignore them as they do not happen regularly. For example, you may only pay obscure bank fees from time to time, or lose inventory to theft occasionally, or have to fight time-wasting printer interruptions a couple of times a month. The thing is, they do add up.

One fascinating thing we find is that most business owners do not associate email use as a hidden cost, despite evidence has suggested otherwise. About a decade ago, business leaders reckoned that email use costs anywhere between £5,000 to £10,000 per employee each year. Just think about the time it takes a person to read an email (or multiple people if everyone is cc’ed, often unnecessarily), reply, sort, delete, and the interruption recovery time between reading/ responding to an email and getting back to tasks – they all add up.

The only way to eliminate hidden costs is to become efficient – in your finance, in your approach to on-site security, equipment maintenance and even your email communication system.

Keeping track of supplier costs

Understanding every aspect of the resources used to produce your products or services is imperative, especially if your profit margin is being squeezed. A few useful tactics which can help to lower your supplier costs include:

• Discussing discounts – Requesting discounts or asking for other value-adds, particularly if your business is prompt with paying bills or wants to sign a multi-year contract with them.
• Sharing supplier costs – Finding another business that can share the supplier costs with you.
• Investigating cheaper alternatives – Although you don’t want to compromise on quality, it can be beneficial to explore other options.

Being creative with space

Small business owners have the luxury of being creative with regards to office space and can lower their cost of rent and utilities as a result. In London, we have met entrepreneurs who choose to have an office outside of London but still keep a desk in the city or use a co-working space whenever they come to London for meetings.

If you are just starting out, working from home or using a co-working space is definitely a sensible move. As your team expands, renting an office becomes a natural move – this is where you can get creative with the layout, like pushing desks together in the middle of the space will fit more team members in the same square footage than arranging desks against the walls.

Making use of the cloud

Today’s digital age calls for a change in how your business operates. Relying on the cloud, instead of having expensive servers on your premises or installing applications in your machines, is one effective way to cut down your IT and energy costs.

Cloud computer, referring to computing based on the internet, allows you to access a myriad of applications – including enterprise-class technology through the internet – with automatic software updates. As your data are stored in the cloud, it means you can literally work from anywhere as long as you have got an internet connection.

In the UK, HMRC has been encouraging small business owners to switch from manual spreadsheets to an accounting system for record keeping. At Berley, we recommend Xero to our clients. Xero is a cloud-based accounting software that is ideal for small business owners and contractors. To find out more, follow this link to the page “Get the most out of Xero with Berley”.

Focusing on quality over quantity

It is well known among manufacturers that improving quality will lead to greater profits. It makes sense – if you do not have to scrap defects, redesign products or manage recalls, you have less administrative and legal issues to deal with, but more loyal customers and greater profits.

The same principle applies to small business owners – the better the quality of your offerings, the more customers you will attract, and the lower the risk of lost business or negative publicity.

Improved quality can also help your product or service stand out in a crowded market, ensuring that your business does not get overshadowed by competition. By continuously striving to take your business to the next level, you can also lower costs through customer retention, as your business will have to spend more money trying to allure new customers than to retain the current ones.

Berley’s accountants can help you manage your business costs

Berley’s expert small business accountants in London know that entrepreneurs are like superheroes. You take on a lot and make many sacrifices along the way. To help you get going, you need a trusted sidekick like Berley who can help you achieve your goals.

At Berley, we think differently to other accountants and will do everything in our power to minimise your tax obligation and maximise efficiency. Call us on 020 7636 9094 or use our Online Form to arrange a no-obligation meeting and find out what Berley can do for your business.

This article was first published in 2017 and was updated on 21/08/2019.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.