Cut Your Small Business Costs In Five Steps

A five-step guide to help entrepreneurs reduce their costs.

Over the last decade, `prudence' was a term often used by Gordon Brown to describe a frugal approach to financial matters.

It's the type of thrifty mindset that's become fashionable, if not absolutely necessary in the current economic climate.

The credit crunch has certainly made consumers focus on value for money. Just compare the latest half-year profit figures of upmarket John Lewis (down 27%) with value retailer Morrisons (up 13%) to see how this shift in behaviour has happened both quickly and dramatically.

Being Foolish in business requires a more consistently prudent attitude, however. If you behave like there's always a recession on, you'll stand a better chance of making a success of both the good and bad times. Here's a five-step guide to pushing down costs in your company:

1. Understand the markets

Business-to-business markets can be surprisingly rigid and inflexible, especially where there's a lack of competition. Take the case of business banking. In 2002, the Competition Commission declared that the Big Four banks were operating a `complex monopoly' which tolerated excessive profiteering from small business customers. Although a ruling forced the banks to reduce their fees, transaction charges are in the main still much higher than those paid by individual customers.

Knowledge is power: if you're aware that you're dealing in an anti-competitive market then you'll be prepared to negotiate harder. Though it may be difficult to get discounts, your supplier may be prepared to offer alternative benefits such as better credit terms.

2. The `business' product may be the wrong product

A lot of products and services aimed generally at `business' may be unsuitable for your own company, especially if they're tailored more for large corporations. For example, most business phone tariffs are priced to benefit the high-spending, so a light business user can often end up paying more than a consumer who makes the same quantity of calls.

Also, just because something is marketed to consumer rather than business customers doesn't necessarily mean it isn't available to everybody - and it doesn't harm to ask.

Bear in mind that cheaper prices may be found in the consumer range, where sales volumes are higher, margins lower, and competition for your pound a little fiercer.

3. DIY

Could you do it yourself? When pricing the cost of business services consider how much time and money it would take to do it on your own. A lot of everyday accountancy can be easily picked up from manuals or online guides, so by doing a little reading you could potentially save on hefty professional fees.

Of course, you are taking a risk by doing it yourself - and it may be that a good accountant will save you more than he or she costs!

If you pay for web design, take heart that the trend is now for simple Internet sites with an emphasis on up-to-date information. Consider the ever-increasing variety of simple yet sophisticated page templates offered by blogging portals like blogger.com, and you could effortlessly rustle up a decent-looking site for free.

4. Make price the priority

Suppliers sometimes perceive their business customers as time-poor and favouring convenience and consistent delivery above price. Shake them from this complacency by researching cheaper options, and then ask them to price match. The best value alternative may not even be that feasible for your size or type of business, but there's nothing stopping you from using your findings as a benchmark to negotiate with your preferred trading partners.

You could start with the world's seventh-largest retailer. Office consumables and produce dominate the 4,000-strong inventory of warehouse club Costco, which has 21 locations throughout the UK. Charging a £20 annual membership fee helps it to cap profit margins at no more than (a staggeringly low) 14%, so its prices are a handy test of reasonableness.

5. Swapping not spending

Money isn't everything - so try to obtain what you need without recourse to your cheque book. Teamuphere is a website that brings together people looking to swap skills and services, and could be particularly useful for start-ups.

When you're setting up for the first time in business, being able to get stuff like websites and accounting services in exchange for your expertise could make a big difference to your initial outlay. As a new entrepreneur you'll doubly benefit through developing your portfolio and growing a network of potential future clients.

Make your money-saving marketable

So now you've taken an axe to your cost base, don't be shy in telling everybody: a deserved reputation for prudence can be great PR, just so long as there's something in it for your customer too.

Marks & Spencer's `Plan A' has made cost-cutting sexy by cleverly spinning waste and energy reduction targets as environmentally beneficial. The M&S shopper gains as his or her green conscience is cleansed.

Though in this case the customer benefit can't be quantified (at least so long as smugness can't be measured!), the strategy fits for a company focused on quality above price.

In an economy where value trumps everything else however, you might do better putting the difference saved directly back into customers' pockets.

Prudence is definitely back.