Cost savings vs revenue generation: which one will make the most profit?

For business owners who are financially savvy, and want to get the best possible return on their investment, which is your business, you are going to be concerned about your profit margins.

A profit in your business is measured by a time frame, typically a fiscal year, and you add up all the revenue that the business has earned for the year, less all the expenses that the business paid out for the year.  What remains is your profit before taxes.

Making a profit in the business is important because you can take that money and reinvest it into the company and grow the company, or you can reward yourself or your investors with income payments. 

What you choose to do with that money will depend entirely on your business strategy plan, which will be covered in a later article.

If you find your business is not making enough profit, you will need to examine the situation further.  You will need to consider some options. Knowing the difference between cost savings vs revenue generation is valuable information.

Increase revenue or decrease expenses?

When a business is looking to improve their profit margins, they will look at two options: either they increase their revenue, or they decrease their expenses.

This is also thought of as cost savings vs sales increase.

Cost savings are easy enough to manage through tightening up expenses.  I always recommend that a business be managing its costs on a daily basis, and you should create a budget to ensure you stay within your planned expenses.

Increasing revenue means getting more sales in the door, or increasing prices.

You could add a new product line, provided that it is profitable, to your offers, but the easiest method to increasing revenue would likely mean increasing prices.

You would need to consider how your customers would react to a price increase.  It’s possible your customers would not react well to a price increase and you will lose them to competitors.  You need to factor that into your decision.

What you wouldn’t want to see happen while you are trying to increase your sales revenue is to see profit decreased.  This can happen, and you need to keep an eye on the expenses to ensure they are not increasing as well.

Let’s have a look at other cost-saving vs revenue generation methods.

If revenue increased but profit decreased

That is not the ideal situation to be in.  You want your revenue to increase and your profit to increase as well.  If revenue increased but profit decreased, you need to examine your expenses.

I always recommend performing an expense analysis on a regular basis, where you are monitoring the expenses on a regular basis.  Controlling expenses is by far the easiest way for a business owner to increase business profit.

Ways to reduce costs and increase profit

Shop around for better deals on products and services

You may have received the best deal when you first signed on with a service provider, but that could have been years ago.  It’s best to shop around periodically to see if you can find a better deal elsewhere.  Be sure not to compromise quality if you are searching elsewhere because a lack of quality can cause a different type of money leak.

You need to find a reputable dealer who will offer the same value of service at perhaps a lower price point.

Feeling frustrated and confused about managing your business finances? Sign up for the Confident Cash Method Program that will show you the four main steps in managing your business finances. Easy to learn, digestible steps to follow in this course.

Get creative and cut production costs

Have a look at production costs and see if there is a way to increase efficiencies.  Does old machinery need to be replaced for something more effective?  Do you need to streamline procedures to save time and money?

You can find creative and innovative ways to save money just by reviewing your processes and procedures periodically to make them more efficient.

Find ways to lower financial expenses

Are you paying unnecessarily high costs for financing or late fees in your business?  When you look at any expense you are generating and can find a new way of saving money, it will add up over the long term. 

Cut marketing costs

Marketing and advertising costs are notoriously high for most companies.  If you are paying a large amount for marketing and advertising, see if there are ways you can save on those expenses.  Be sure that you are measuring the metrics to ensure that your marketing dollars are being put to good use, that you are bringing in new customers and your visibility is increasing.

Think economies of scale

Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods and it makes it easier to produce at a lower price due to the amount and quantity.

The size of the business generally matters when it comes to economies of scale. The larger the business, the more the cost savings.

There are 3 main ways to improve the profitability of your company:  Sell more, price higher and reduce costs.

Focus on efficiency

When you focus on efficiency you are saving time and energy producing a product, similar to the economies of scale method.  You are increasing revenue while decreasing expenses. 

If you are a brick and mortar and you are finding foot traffic isn’t popular early morning, late in the day or both, try experimenting with cost saving measures like reducing your store hours.

If you have a large facility and have extra space, consider renting out office or manufacturing space to increase revenue.  Workspace sharing is a great way to increase revenue while decreasing costs.

Technology offers great ways to streamline processes and procedures which reduces cost and increases your revenue. 

A basic way of reducing expenses and I find this is not practiced nearly enough is to treat your team well.  When you have people working for you who feel valued and appreciated, they feel like they are part of a team and will go above and beyond for the business in terms of serving customers and remaining loyal. 

Attrition is a high cost that can be avoided easily when you are honest and fair with your team members.

Cost savings is easier to control

When you can control your inventory and production lines to reduce errors and focus on quality control measurements, that is a cost reduction practice.

Streamlining production lines for efficiencies and creating statements of procedures that minimize the errors or exposure to the risk of errors is a great cost reduction strategy.

Cost reduction strategies in business

Customer retention is the best cost reduction strategy that there is in business.  When you can keep your customers happy they will keep coming back.  Nurture the customers that you have because acquiring new customers costs a lot of money. 

In low-margin businesses, even a modest reduction in costs can make a difference, having the same effect as a significant increase in sales volume.

Why is it Easier to Work on a Cost Reduction Strategy in Business?

It’s so much easier for a business to control the costs as a cost reduction strategy focuses on in-house resources and how resources are managed within the company. You can get employees involved who work directly on those tasks to point out ways to make tasks more efficient.

All start-up and growing businesses have an element in common: they are looking for ways to increase revenue, decrease expenses.

Because increasing revenue is often more out of the control of management, decreasing costs is the smart way to start with.

But once you’ve managed to decrease your costs, it’s best to start looking at ways to increase the revenue.

4 Ways to Increase Your Revenue

Increasing revenue should never be taken off the table.  There are several ways revenue can be increased.

Increase the number of customers you have

You can increase the number of customers by focussing on acquiring new customers.  This is the most expensive way to acquire a new customer, but it can still pay off.  Think of creative ways you can reward existing customers for their referrals, or try finding ways to increase the visibility of your business through cost-effective ways such as media stories.

The more creative and cost-effective ways you can get new customers in the door, the higher the payoff.

Increase the average transaction size through upselling or downselling

There are always alternatives sales you can offer a customer.  If they are in your shop they are an interested buyer, so because they aren’t interested in one item doesn’t mean you can’t entice them with another offer.  Or add items to their sales carts.  Bundling products is a great way to increase sales with little effort.

Increase the frequency of transactions per customer

Entice your customers to frequent your establishment more regularly.  Offer daily specials or weekly sales to get them through the door more.  Build relationships with your customers so they want to return for the great service, personal charm or whatever it is that gives them that connection with you.

Raising prices

The easiest way to increase revenue is to increase your prices.  You do need to approach this method with some caution – you need to be sure that your customers will tolerate a price increase.  Pay attention to your competition to see what they are charging and if there is room to increase your prices.

The bottom line is that cost savings vs revenue generation is a completely doable strategy.  Cost reduction strategies are important to follow and then increasing revenue, but they can be done simultaneously.  Be sure to keep monitoring the numbers when you implement these strategies to ensure all your efforts are paying off and increasing your profit margins.

If you need to increase your knowledge of your business numbers and want to learn how to read financial reports, create a plan for your business, monitor your progress and create a cash management system in your business, click on the image below for more information on the Confident Cash Method Program.