Dec 2, 2022
Cutting costs can be a quick and
easy way to improve the profitability of your construction
business. Introducing cost-control measures can bring immediate
savings and ensure you remain profitable in the long term.
But cost-control measures must be carefully managed. Eliminating
errant expenses is beneficial, but indiscriminate cost-cutting
could lead to a drop in quality or poor morale if staff fear being
made redundant or are not given the tools they need to do their job
efficiently.
This risk is heavily reduced by identifying where you can safely
trim costs, setting clear cost-reduction targets, and researching
any cost-saving initiatives before making changes to your
contracting business.
Planning for
effective cost-control
The first step towards reducing costs is identifying your major
cost areas. These are likely to include:
1. Profit and Loss
Start by assessing your profit and loss statement for the last
six months and rank all your expenses from highest to lowest,
working your way down the list and identifying areas where you can
reduce costs. It's a good idea to first focus on identifying
cost-saving measures in places where you'll see the most
significant return. For example, it's wise to work toward saving 5%
on a $200,000 expense rather than a slightly higher percentage on a
lower-cost expense.
2. Try new
ideas
You might find it challenging to anticipate savings without
implementing new systems and processes. Remember that any changes
you make don't need to be permanent. If you aren't sure if a
cost-saving measure is suitable for your business, consider trying
it for a few months and then assessing the results. This way,
you'll know the actual cost savings without committing long-term to
new processes or changes.
Any new processes or systems should be benchmarked and frequently
revisited to ensure they are still suitable for your business.
Consider asking staff for feedback around any changes to confirm
that no hidden problems could cost you more than the cost-saving
value.
If you are in doubt about any potential changes, consider seeking
professional advice from an accountant, industry association, or
business mentor.
3. Quick
savings
You might be surprised that significant savings can be made without
worrying about your quality and affecting performance. Here are the
most popular ways to trim costs without making radical changes.
4. Significant
savings
Once you have identified your major cost areas, you may want to
investigate potential ways to save money by changing existing
processes.
Some of the most common opportunities are listed below, but before
adopting any changes, you should be aware of any potential damage
to your core business activities.
There may also be other costs, such as long-term, fixed-rate
business loans or fixed-price contracts for raw materials, that you
may be able to reduce when these are up for renewal or tender.
Pitfalls to avoid
Reducing costs can have a negative effect, so you'll need to be
sure that changes will not compromise your operational
performance.
Some common pitfalls include:
Employee
costs
Reducing employee-related costs is generally risky and
counterproductive in the long term. Reducing costs such as staff
training or meeting times could lead to poor staff morale and
reduced productivity.
Making employees redundant could bring short-term costs and the
risk of possible employment proceedings. It may also contribute to
low morale. Changing an employee's terms and conditions can also
create legal issues in some circumstances, so it's always a good
idea to get expert advice before making a decision.
These problems can be minimized by maintaining clear communication
with employees. Introducing cost-saving through improved practices
and procedures will require a degree of employee 'buy-in' so your
employees know why you are making changes. Employees may need
additional training and support over these periods.
Next
steps
Final
thoughts
Every small construction business owner knows how challenging it is
to cut down expenses without somehow compromising internal or
external quality. Regardless of your business's nature, the first
step to reducing your overhead costs is to take the time to go
through every single expense you have -assess which ones are
necessary for your business to operate smoothly, what can be
trimmed down, and what can be eliminated.
It's important not to rest on your laurels. Continually thinking of
ways to reduce your overheads is essential for a healthy cash flow,
so conducting regular reviews of your business expenses should be a
routine task.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com