Approaches to reduce costs in your business: Practical cost reduction strategies

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Approach 1: Setting clear expectations on spending

One of the first key components of reducing the costs of your operations is to communicate clear expectations regarding the need to be mindful of spending. Whether employees, for example, believe it is ok to book an extended business trip, staying in an expensive hotel, in part depends on the expectations that are set regarding this. Similarly, the need to shop around for the best price on goods and services purchases is influenced by the extent to which this is conveyed as a priority. 

Approach 2: Requiring approval for all costs above a limit

Another approach for helping to reduce organizational costs is to require management approval for all non-negligible costs – potentially above $100 or $1,000. While there is a danger that such approvals become more a formality (without actually resulting in any cost savings), this can help on several dimensions:

  • Encourage employees to be cost-focused: Having to run all your costs past management in advance helps drive the mindset that costs are important. Having someone review all of your purchases can result in employees being more conscious of the costs that they are incurring.
  • Allows management to monitor spending: The other component is that it also gives management an opportunity to actively monitor the costs – potentially becoming aware of expenses that are less easy to justify or to see opportunities for cost savings. 

Approach 3: Zero-based budgeting

Another approach to actively reduce costs from operations is to require each budget to be re-justified every year. A traditional approach to budgeting is to take the prior year’s costs, potentially add an inflation adjustment, and then use this as the budget for the coming year. The danger of this is that it can encourage wastefulness – rather than come in under budget (and risk having a lower budget the following year), managers may look to ensure that their entire budgets are spent. 

Zero-based budgeting attempts to remove the incentive to always spend the full amount of your budget, by requiring all budgets be rejustified from scratch each year. Instead of just copying over what you incurred last year as a basis for upcoming expenses, you must justify why the expected costs are neaded. 

Approach 4: Understanding where costs are incurred - and systematically reviewing all key costs

Another component of achieving cost reductions is to actively look to understand where costs are being incurred. A danger when looking to reduce costs is to focus on the easy, and yet minor, costs savings. While a true cost focus may require savings no matter how small, it is important also to not let the small ‘easy’ savings distract from larger savings that can be achieved from concentrating on major organizational costs. Costs such as labor and facilities often dwarf the much smaller savings that can be realized on stationery. The better understanding that you have of your overall cost structure, the easier it is to focus on the greatest opportunities for savings. 

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