The Balancing Act of Cutting Costs

When it comes to budgeting most people think “what costs can I cut?” Whether it’s finding a cheaper brand, getting bigger discounts or doing something yourself instead of paying someone else to do it. However cutting costs can come with its own costs.

Wise budgeting is not simply about finding the cheapest way to do something. In fact sometimes paying the cheapest option can end up costing you more in the long run. Low quality materials can break a product. Unskilled support can result in costly mistakes. Devoting your own time to take care of the backend processes can reduce your ability to work on your area of the business where you are needed to bring up the income levels.

Bookkeeping is a common example. A small business doesn’t want a lot of overheads. Bookkeeping can seem easy and there are plenty of bookkeeping solutions on the market designed to help keep it simple. Saving costs by just doing it yourself, or hiring someone who isn’t experienced, has a big appeal. But unless the bookkeeper actually understands what they are doing, here’s what it can end up costing you:

1. The opportunity cost of your time. When you’re busy doing the bookkeeping, micromanaging an inexperienced worker, or trying to work out new software, you’re not working on the core of the business.

2. Mistakes that can be costly to rectify. Using a software solution to get the job done seems easy, after all that’s what it’s designed for. But when accounting is not your subject, you’re likely to make mistakes, whether its setting something up incorrectly, missing an important step, or making incorrect entries. Without an understanding of what is happening behind the entries, it can be difficult or impossible to work out where errors are. If you only use an accountant at the end of the year, these mistakes can end up costing:

• Higher accounting fees for an accountant’s time to reconcile and correct
• Potential fines/penalties if the mistake has impacted an area of tax law such as superannuation, or GST.
• Slower turnaround in getting proper financial records completed and/or completing your tax obligations.
• If you have made business decisions based on how the bookkeeping records showed the business was tracking, you may have made inappropriate decisions that need to be rectified.

Making prudent budgeting decisions is a real balancing act. You need to spend money where it will be useful to the business. Paying for higher quality from the start, whether it’s professional support, quality materials, or giving your business an edge with presentation and marketing, can put you in a significantly better financial position going forward. However, you do need to be careful not to go overboard or waste money on non-essential costs just for the sake of trying to be more professional.

Assess what you need:

Make sure you understand what your business needs. Get a clear understanding of all the materials, staffing, professional advice, location, software, and support that you need to get your business running smoothly.

Assess the skills you do and don’t have:

You and any business partners you’re working with will have a specific skill set, and there will be gaps in that skill set. Perhaps one of you is an expert with the product and another is skilled with the customers, then you can identify gaps such as marketing, for which you need to hire suitable support.

Work out your opportunity costs:

It’s not enough to simply recognise where your skill sets are. You also need to work out where your time will be best served. You may have the skills to organise the finances, run the marketing, liaise with the customers, and do deliveries. However, if you try to spread yourself across all these fields you will not only wear yourself out, you will be spending time on areas that other people can assist with. Work out where you are best suited by understanding what you are giving up if you take on too many roles. There is no point spending time running deliveries while you should be working on your product if you can hire a uni student to do the deliveries. Even if you have a solid understanding of bookkeeping if you’re spending your time running the books, what are you missing out on doing while keeping on top of that?

Work out how to trim expenses:

Understand how you can cut costs without compromising on quality. If you have ongoing expenses that don’t degrade over time, see if you can save by bulk buying. Figure out if it is more cost effective to pay an efficient expert upfront than to pay cheaper rates for someone who doesn’t really understand what they’re doing. Balance your budgeting by cutting where you can, without cutting so deeply that you eat into the time and expertise that you really need to keep the business running and growing.

Pay for what you do need:

When you have a thorough understanding of what you need, what you can do yourself, and what it will cost you, you can make balanced smart Budget decisions. Understanding not just the raw figures of cost-cutting, but what it means to cut certain costs, helps ensure you make decisions that don’t end up compromising on the quality support your business needs to present a quality product or service.

At the end of the day, wise budgeting is not just about cutting costs, it’s also about working out where you really do need to spend some extra money.