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What is cost saving?

Cost saving is an action that helps a business reduce its operating expenses or debt. A company can use cost-saving methods to improve its profitability or maintain its competitive advantage in a dynamic market. Cost savings are usually tangible and measurable. Cost savings measures usually feature in documents such as your budget and financial statements. This is because they affect existing line items when comparing one accounting period to the next. These types of strategies are usually easier to use for justifying new projects and initiatives because they're measurable and documented. 

6 types of cost savings

Here are six types of cost savings strategies you can use to lower business operating expenses:

1. Substitution
Substitution requires you to find cheaper alternatives for products or services a company requires to function. This can be in the form of using open-source POS software instead of a subscription-based alternative. Choosing free or less expensive substitutes can help an organisation lower its operating expenses and improve its cash at hand.

When you want to implement a substitution cost-saving measure, do some research to find out companies that offer the same product or service you want to substitute at a cheaper rate. After your research, you might discover that the free version of a popular alternative has all the capabilities the business requires to perform its functions effectively.

2. Combination
Combination as a cost-saving measure involves combining two or more business functions or expenses to reduce costs. For example, you can reduce business costs through insurance. By using the same insurance company for different functions, such as vehicle insurance and equipment insurance, a business may be able to negotiate lower rates, which can reduce overhead in the long run.

3. Adaptation
You can also lower business costs by adapting to the prevailing realities in your industry or your specific situation. For example, if a business realises that inflation is raising its production costs, it can cut costs by reducing the size of its products, especially if other companies are using similar strategies to lower their operating expenses. Another form of adaptation is to change the employment structure, such as using freelancers or contractors, instead of hiring permanent staff.

4. Modification
A company can also modify its operations to reduce costs. Reducing physical locations, changing employee compensation structures and making other changes can reduce overhead. For example, if a company discovers that it's losing more money than it's making from its physical stores. To counter this problem, it can cut costs by launching online stores while reducing the number of brick-and-mortar locations to reduce rent and other related expenses.

5. Reallocation
Reallocation of resources can also serve as a mechanism for reducing business costs. Identify ways to use existing resources for other functions. For example, rearranging the office space can create room for a new employee, saving the business the cost of getting the person a new office. Old equipment can also be repurposed or upgraded for other uses, allowing the business to avoid investment in new infrastructure. Businesses can reallocate furniture, electronics and human resources to achieve cost-saving goals.

6. Elimination
You can also brainstorm on the expenses the company can dispose of or eliminate to cut costs. In many organisations, this can be eliminating duplicate or redundant positions, selling off obsolete equipment or cancelling the requirement for dedicated desks for each employee. You can also eliminate in-person work hours and focus on remote or telecommuting and other flexible working arrangements to reduce the cost of rent, power and other miscellaneous expenses.

Cost saving can improve a company's financial health and free up resources for other important operations. Whether you're looking to cut costs because of economic reasons or to improve your balance sheet because of competition, you can choose from several strategies for cost savings. Knowing about the different methods to save business costs can help an organisation improve its finances and streamline its operations with specific financial goals. In this article, we define what cost saving is and list the types of cost savings techniques businesses can use to cut costs.

9 examples of ways to save cost in a business

Here are nine examples of cost-saving methods you can use to reduce expenses in a business:

1. Reduce spending
To do this, first identify the essential tools and resources the business requires to operate. Determine maintenance costs for current assets and equipment. Then, look for ways to reduce or eliminate every other expense that isn't critical for the company's functions.

2. Delay IT equipment upgrades
One of the major overheads of businesses is the upgrade of IT equipment, such as computer, network and database management systems. Upgrading these systems is important because older hardware and software often have vulnerabilities that can lead to downtime and a higher risk of breaches.
If you consider the cost of an upgrade as too high, you can delay IT upgrades until a time when the company's finances improve. Until that time, you can perform software updates to improve the functionality and safety of your IT infrastructure and also train staff on best practises to avoid or reduce accidents and data breaches.

3. Cut research and development
In many organisations, a sizeable portion of operating expenses goes into research and development efforts. Unfortunately, R&D programmes often take years to deliver results, and disruptive changes in an industry can render years of research obsolete. If you want to cut costs in the short term, it might be worth considering aspects of the company's research budget it can reallocate to more important areas. For example, an existing product line that requires expansion to boost revenue and productivity might be more important than research aimed at developing a new product that has no ready customer base.

4. Evaluate employee benefits
Employee perks are ways companies make themselves attractive to talent. In large organisations, such perks can be a huge drain on limited resources. Cut costs by evaluating employee perks to determine whether they're achieving desired results. If your evaluation shows the programme is performing below expectations, it's advisable to substitute it with a less expensive alternative that frees up liquidity for more important business functions.

5. Reduce physical inventory
Holding a large amount of physical inventory can protect a company from inflation and reduce the time it takes to fulfil orders. When a company is struggling with its finances, having many physical products in inventory can tie down cash and reduce cash flows. Temporarily reducing your holdings of physical inventory can lower storage costs, which the business can channel to other aspects of its operations.

6. Assess transport requirements
A large amount of business expenditure goes into transport. For businesses that operate a company fleet, the cost of operating and maintaining the vehicles, paying drivers and buying vehicle tracking services can be high. Evaluating your transport requirements can help you identify ways to streamline your operations, reduce the fleet's operating expenses and save on costs. For example, the company might find that it's cheaper to rent vehicles on a needs basis rather than buy them outright. Electric or hybrid vehicles might also be cheaper in the long run than petrol-fuelled cars.

7. Consider downsizing
Downsizing is ideal for companies that have several outlets which are seeing fewer customers than is normal. This can happen for several reasons, including seasonality, competition and other factors. By closing stores that aren't generating adequate revenue, you can manage costs and invest the savings in improving the customer experience and conversion rate of more successful outlets.

8. Reduce waste
Identifying sources of waste and eliminating them can also help an organisation save costs. Assess the operations of the various units in the company to determine potential waste. Reducing waste not only helps lower operating expenses, it can also provide environmental benefits and improve efficiency.

9. Recycle materials
If your business operations generate waste by-products, find out if another company can use the waste as raw materials for their own production activities. That way, you can turn waste into revenue. The revenue from the sale of the waste can help offset some of the business expenses, which makes it an effective way to save costs.

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