Start lean, stay lean: How small businesses reduce expenses
Whether you’ve been in business 20 minutes or 20 years, when it comes to spending money, it’s wise to act like a startup. It’s time to “start lean and stay lean.”
Being “lean” means keeping things as light as possible—spending and owning the least amount. You’ll keep more of your money (always a good thing), and, just as importantly, you’ll be less bogged down by infrastructure—the “stuff”—of your business.
Consider: a food truck is leaner than a brick-and-mortar restaurant. It not only costs less to start, but a food truck owner can quickly move to a better location, change the food offered, has fewer employees, and takes only a vehicle lease instead of a long lease on a building.
In my own business—a publishing company—I just faced the question of should I go leaner. Believe it or not, it wasn’t an easy decision.
We’d just finished updating the newest edition of our flagship book, Successful Business Plan: Secrets & Strategies. In the past, I’d print thousands of copies at a time—at least six months’ worth. This cost me tens of thousands of dollars in printing and shipping to have the inventory I’d need on hand at my distributor. But I wouldn’t see my first dollar in sales for months.
This time, our distributor offered us the possibility to “Print to Order.” Books would be printed only when an order was received. No upfront huge printing bills. No inventory. No shipping from printer to distributor. No waste.
Easy decision, right? Not so fast. Printing unit-by-unit costs more than printing large quantities. And I wouldn’t have the security of knowing I had inventory on hand when a big order came in.
But it made sense: dollars-and-cents. I went “leaner.”
How do you become leaner in your business?
First, look at everything! Just because it’s a recurring monthly bill, there are still ways to reduce costs. Perhaps you chose a company because of a tempting “introductory offer” three years ago, but that $39 a month is probably $150 a month now. Here’s a dirty little secret: companies know you get busy, and they slowly raise prices, especially on long-term customers. I’m betting your insurance—whether it’s health, liability, vehicle, or fire—has increased substantially since you chose your provider.
Next, recognize you have two types of expenses to tackle:
- Fixed expenses you have to pay every month, week, or year, regardless of how much you sell.
- Variable expenses that change depending on how much demand you have for your products or services.
Let’s look at some ways to reduce both types of expenses.
Ways to reduce fixed expenses
Fixed expenses are expenses like rent, ongoing contracts, term loans, equipment and vehicle leases, insurance, or any other expense you can’t eliminate or reduce when sales drop. They make it harder for you to respond to changing conditions. How can you deal with them?
- Negotiate hard. In addition to trying to get the lowest cost, make the lease as short as possible, have provisions allowing you to sublease.
- Use “rent-as-you-go” space. Small businesses now have more choices of temporary work spaces: offices with desks, rental kitchens, and other short-term, rent-by-the-day or hour types of spaces.
- Renegotiate your lease. If rent becomes a hardship, talk to your property manager to see if they’ll work with you to lower your monthly rent, delay payments, or otherwise help you stay in business.
Term loans and equipment/vehicle leases
- Extend current leases at old rates. Interest rates have been skyrocketing. Read the fine print of current leases to see if you have the option of extending them at the original interest rates.
- Negotiate with your vendors. Everything is negotiable. Don’t be afraid to see if you can get lower rates or better terms than originally offered.
- Look for sources with lower interest rates: Can you take a loan from a different source with lower costs, such as SBA loans or a line of credit that would enable you to pay off higher interest-rate fixed expenses with a lower-cost option?
Ways to reduce variable expenses
Variable expenses—inventory, raw materials, staff—sound easy to reduce, since they change depending on how much demand you have. You need less stuff when you have fewer sales, right? Not so fast. It’s not usually an immediate relationship between a customer wanting your products or services and you providing them. You need inventory to be able to entice and sell to your customers. You need staff, and often space, to be able to provide your services. You need raw materials to manufacture your products.
But how do you reduce costs on variable expenses?
- Choose vendors based on more than price. Look for their ability to fill orders fast, more generous payment terms (such as more time to pay your bills), reliability, and the option for you to pay with credit cards if you need to.
- Purchase carefully. Examine past sales records and forecast sales conservatively. It may be better to lose a sale than to spend too much on inventory, raw materials, or supplies.
- Seek out vendors with the fastest turnaround times. That means you can order closer to when you actually need to use a product—and you can make changes in your purchasing patterns based on more real-time demands.
- Seek out local vendors. If a vendor is closer to you—geographically—it means faster shipping times (and typically, lower shipping costs).
- Ask for “good customer” discounts. Most companies, especially shipping companies, have discounts for larger customers. Ask them to provide you with those rates, even though you are a small business.
- Encourage customers to pre-order. The longer in advance that you know what a customer wants, the more time you have to get the materials, inventory, or supplies you need. Providing a discount to customers as an incentive for pre-orders, especially pre-paid orders, helps you significantly reduce the inventory you need on hand and may more than offset the lower price you charge.
Have your vendors “own” your inventory
The absolute best way to reduce your inventory is to find a way to not have any inventory until you actually sell a product. Remember my print to order books? I don’t have any inventory—I don’t own physical books—until I have an order.
Of course, not every business can manufacture a product so quickly. But there are now many companies that enable small businesses to not actually ‘own’ their products until sold.
Jeff Bezos started the “largest bookstore in the world” exactly that way. Bezos didn’t have to own a single book when he first launched Amazon. He identified book distributors with huge inventories that could fulfill individual orders for him quickly. He was able to spend his money on building an online “bookstore” without having to spend his funds on actual books.
You’ve now probably seen thousands of online stores doing exactly what Bezos did at first. They create an attractive web “storefront” that sells products, but the order goes to a third party that owns the inventory, fulfills the order, and in some cases, even uses packaging with the name of the reseller.
Of course, you don’t make as much money on each sale doing this as you would if you maintained the inventory yourself. But you have far less financial risk.
You don’t have to do this only with a web storefront. Whatever line of business you are in, investigate if there are suppliers who will quickly fill orders for you when you have an order.
Seek out distributors and wholesalers who will do direct fulfillment of their inventory for you and bill you as products are shipped.
One critical way to stay leaner is to be vigilant about cutting waste. Whenever you see waste, you’re looking at something you paid for and didn’t consume. It might be excess inventory, excessive raw materials, excess packaging on your products, delivery packaging, or even lights and heat left on when no one is present. All those things add up to money—your money—going to waste. Make sure everyone who works with you—whether staff, subcontractors, delivery personnel—understands just how much you hate waste. Examine every aspect of your business to be more efficient, use fewer resources, and cut out waste. Waste, of any kind, wastes your money.
Rhonda Abrams is one of America’s leading small business experts. Her business plan guide, Successful Business Plan: Secrets & Strategies, was named one of the 100 best business strategy books of all time. She has also started, built, and sold four businesses. She was educated at UCLA and Harvard University and lives in Palo Alto, CA.