What are cost savings?
As the name suggests, cost savings are the result of reducing the total cost to run your business. If last year you spent 80 cents for every euro you brought in, this year you may aim to spend 75. And particularly if you expect slow growth or to bring in less revenue overall, increasing your profit margin is highly worthwhile.
Cost savings are a goal for many finance teams. You make a cost reduction plan, identify your bottom line, and find areas to improve the return on every dollar, pound, or euro spent.
Which means that this isn’t only a result of good luck, but a strategic program run by financially savvy organisations. This is why cost savings are often also known as “hard savings.” Soft savings are the cost reductions that just come naturally through good work. Hard savings come from intentional cuts and are clearly visible in your financial statements
What is cost avoidance?
Cost avoidance is the practice of removing whole items from your budget, and therefore avoiding that cost altogether. This is a key aspect of a broader cost savings approach: if you can efficiently eliminate certain costs completely, you have more bandwidth to look for cost reductions elsewhere.
Cost avoidance vs cost savings
Cost avoidance ultimately brings the same result as cost savings: lower expenditures. The key difference is that, rather than finding lower-cost options for certain expenses, cost avoidance means removing those expenses completely. This could be achieved by a strategic pivot or a sharp change in the way your business operates.
Some cost avoidance will be built into your business model and modes of operation. For example, if you’re a cloud software or Software-as-a-Subscription company, you won’t have any shipping or logistics costs. That’s the very nature of the business.
But regardless of your business model, you may find ways to avoid certain costs through process enhancements and new technology, or by removing more expensive services.
Some examples of cost avoidance techniques include:
Digitising processes otherwise done by humans. New technology lets companies remove certain functions and avoid payroll and insurance costs.
Removing a product line. Some products or services may not be worth the investment. Rather than reducing investment, you may simply stop offering them.
Outsourcing tasks. Similar to digitisation, outsourcing lets you avoid certain fixed costs like salaries and insurance, recruiters’ fees, and stock options.
Eliminating perks & benefits. This is obviously unpopular with those affected, but you’ll reduce future costs from certain benefits to zero if you simply stop offering them. This could include free lunches, team-building activities, and paid staff trainings.
Classic examples of cost savings
The key to cost savings is optimisation. You need to regularly review the amounts you spend on different programs or services, and efficiently renegotiate prices or find other suppliers.
Virtually every expense leaves could be questioned or revised. But when companies need to tighten their belts, these are some of the first areas they target.
Negotiations with service providers
Great procurement professionals and CFOs use industry benchmarks to get better prices from their service providers. This is often the hard, slow part of achieving cost savings. But where you have significant costs, including rent, servers, and utilities, the time and effort may pay off in the long run.
Social media spend
Marketing is often a significant company cost, and social media spend is one facet which is relatively easy to adjust in real time. You can usually see the best- and worst-performing campaigns and channels, and can simply stop doing what’s not cost effective.
Many companies have no idea how many software licences they have, or the total amount spent. And many are completely unnecessary — you may even have the same licence multiple times for no reason. A comprehensive audit and rationalisation of these subscriptions every year can yield much lower costs.
You may be locked into a rent agreement with little room to renegotiate. Which is more painful if you don’t use the full value of the space provided every day. Particularly in companies with hybrid work cultures, you may be able to share the cost of rent by subletting a floor or making meeting rooms available to your neighbours (for a fee).
Partnerships and shared costs
Another option for some companies is to share the costs of marketing campaigns, event budgets, and other often expensive programs. Create partnerships with brands with a similar audience or goals, or find sponsors for your most visible events.
Principles to save costs effectively
If cost cutting is a major business priority, you need the right approach. Cutting too much or from the wrong programs can be a major growth inhibitor for small businesses.
Cut fat, not muscle
Finance teams must not simply look at the bottom line. Where and how you cut costs is vital, and often more important than the overall amount cut.
This principle is relatively simple: don’t cut 20% across the board - cut 100% of the things that don’t work. It might seem obvious, but many companies hurt their own growth by cutting too hard and too fast, and can’t recover when the market becomes more favourable.
Work big to small
This is also fairly obvious, but easy to overlook. You might walk into the office kitchen, see snacks, and fret that they’re not directly bringing new business. You want to cut them.
But depending on the amount of free goodies, they likely make no impact at all on your business budget. If you spend £350,000 per month on Facebook ads, and £2,000 per month on office coffee, it’s pretty clear which one deserves more attention.
Cost reductions can be unpleasant, particularly where employees feel they’re under a microscope. So finance teams need to work closely with stakeholders to ensure the message is delivered well.
Most often, this requires transparency. If teams can see the company’s financial position and understand why change is needed, they’re more likely to meet you halfway and act in the company’s best interests.
More visibility equals more savings
The single best step you can take to save on costs is to know where your money goes. Most companies lose huge amounts through ghost or maverick spend, where money goes out without a clear account.
This can be done in good faith - team members may just be doing what they think is right. But if the finance team doesn't have visibility and control over spending, these hidden costs can quickly get out of hand.
Make sure you have a clear overview of company costs in real time. Don't wait until the end of the month or year to see what was spent.
Gaining full visibility and removing unwarranted spend is the single fastest and best way to save costs and ensure a more efficient business long term.