How to analyse business cost-effectiveness | Cost-efficiency guide

What is cost effectiveness?

There’s only a limited amount of money we have to spend on our business. Being cost-effective is ensuring you are getting the maximum out of your available funds. It’s ensuring that you’re spending your budget on the right things with the aim to get the best value for money that you can.

Sometimes this can be a straightforward calculation. For example, working out your Return on Investment. If something you’re paying for is driving strong sales at a low cost – that would seemingly demonstrate a good ROI. But, could there be a cheaper solution?

ROI can be worked out using this calculation:

• ROI = Net Return on Investment ÷ Cost of Investment × 100%

It’s not always as simple as working out ROI, though. Whilst some business expenditure will have a direct impact on income generation, lots of your expenditure will deliver value in other ways. This might indirectly generate a financial return – but working out its cost-effectiveness requires a more nuanced and subjective analysis. For example, paying for something that saves time or negates the need to outsource or recruit.

Ultimately, you as the business owner will have a good idea of whether your expenditure is cost-effective. But, regularly reviewing and analysing your costs as objectively as possible is good business practice. A great way to regularly monitor cost-effectiveness, is to download a budget tracker app.

How could I make my business more cost effective?

Marginal gains made right across the business can make a big difference overall. 

Let’s look at each of these six areas to see how you could make your business spending more cost-effective. 

Staff

As a business owner you need to cast a critical eye on your wage expenditure and staff costs.

Given the financial outlay, when you take on new staff it’s imperative that your role creation and recruitment aligns with your business strategy. You need to have a firm idea of your Key Performance Indicators (KPIs) and ensure each new position is filled with this in mind. For example:

• Salespeople need to sell products (specify a number)
• Marketing roles need to deliver ROI (specify a percentage)
• Finance roles need to ensure a healthy cash flow (working capital targets)

If they’re not doing this, then you have every right to question their cost-effectiveness.

Elsewhere, apprenticeships can be a cost-effective way to recruit and train staff – particularly with the government offering a new ‘Kickstart Scheme’ to boost jobs for young people and subsidise employers.

Alternatively, outsourcing can be a short-term solution if you can’t afford a full-time member of staff or are looking for project support.

Premises

The Covid-19 pandemic has meant many people have been mobilised to work from home. This has potentially accelerated the shift to home working as the norm. Certainly, this represents a huge saving businesses can make if they no longer need large and expensive office space in urban centres.

However, we are perhaps being too quick to write off the need for close human interaction with our colleagues and the benefits this can bring to our work.

Is there a balance? Can you move into a smaller space and have a rotating residency?

If you are working from home, you also need to ensure that everyone is set up to work effectively in this capacity. Project management and communication tools are essential. Microsoft Teams is a good example of a tool that combines both.

Equipment

Some businesses may only require a very basic set-up – laptop and an internet connection. Others, though, will need tools, vehicles, machinery, kitchens, and specialist hardware – all of which can be highly expensive.

In a lot of cases there are not the funds in the business to invest and funding is required. In the aftermath of Covid-19, government-backed funding may be available through the Recovery Loan Scheme. This scheme replaced the Bounce Back Loan scheme and offers highly competitive repayment terms for successful applicants. Failing that, it’s worth exploring alternative routes such as asset finance.

The other option is to lease equipment rather than paying for it outright. Some people are wary of this option as they prefer to own their assets. However, there is a strong case to be made that leasing is more cost effective:

• Payments are spread so the outlay is more affordable.
• As a result, you can purchase better and newer equipment.
• Leasing arrangements often include the cost of maintenance should something go wrong.
• You don’t have a depreciating asset on your books.

Suppliers

There are many different types of suppliers that a business will typically use.

• Utilities
• Services
• Manufacturers
• Wholesalers
• Banking

Unless something goes wrong, it’s easy to settle into a relationship and never bother to review or change suppliers. However, it’s well worth regularly conducting a supply chain audit to assess not just what you’re paying out but also if there are any vulnerabilities. The latter point is especially true in relation to Brexit and the consequences on your supply chain – e.g. are your manufacturers likely to see an increase in costs and delivery times?

If you’ve been a loyal and important customer, you may be able to negotiate discounts – or change the way you work to be more cost-efficient (for example, ordering in bulk). Alternatively, shopping around may highlight that you’re overpaying for a service you can get cheaper elsewhere.

Finally, are you paying out for things you can get for free? Most people stick with the same business bank but could save money by switching to a free business bank account with no monthly charges or transaction fees.

Software

Using software, in theory, should help to make your business operate more effectively. Here are some of the typical software products that a small business can take advantage of:

• HR software
• Payroll software
• CRM software
• Accounting software
• Point of Sale software
• Email marketing software

Paying out for lots of different licenses, however, can soon add up. And some software comes at a significant cost. For example, a comprehensive CRM package can cost upwards of £10k a year. You need to be careful to ensure you’re only paying for what you need. Do your due-diligence and shop around to find the right software for your needs. Is there an all-in-one or integrated solution that could cover several business functions – for example, with accounting, payroll and payment solutions there is often a lot of overlap, similarly with CRM and email marketing solutions. Finding the best bank account for your business can also help with cutting costs. 

There might also be free options that are perfectly suitable for your business needs.

• Wave provides free accounting software.
• Mailchimp offers free access to its email marketing services.
• HubSpot also offers a free version of its CRM software.
• Trello is a flexible project management tool that you can access for free.

At the very least, when you sign up to a new service, there’s often a discounted period you can take advantage of when starting your subscription.

Marketing

First, it’s hugely important to have a marketing strategy. This will link into your wider business plan and summarise how you plan to approach and achieve your objectives. This will help to make your approach more focused and cost effective.

Having a strategy in place will then help you to execute your marketing plan – this is the tactical details of how you plan to achieve your strategy.

If you’re looking to be cost-effective, digital marketing is the way to go. Google Ads, SEO, social media, email: all of these channels can be used in a savvy way to help you:

• Target specific audience groups
• Track and monitor results in real-time
• Test different messages and creatives
• Optimise activity and spend as you go

For example, if you’re spending money on Facebook Ads you can retarget people you know have visited your website. If you’re running Google Ads, you can target specific locations and relevant keywords. If you’re delivering email campaigns, you can segment your audience by average order value. And, perhaps most importantly, do all of this whilst ensuring your website is optimised to capitalise on the traffic.

Also, consider if there are opportunities for you to advertise for free?

Our digital marketing on a budget ebook provides practical pointers on how you can implement a cost-effective approach to promoting your business online.