I know people save money, but how can companies save money so they don't go broke?
When your parents feel that the family is spending too much money, how do they cut back? Maybe they don’t go out to eat as often. Maybe they use more supermarket coupons. Perhaps they decide to cut the grass and do the yard work themselves instead of hiring a service.
Well, companies also have to find ways to reduce their costs, especially during difficult economic times like we’re experiencing now. When times are tough, companies often experience a decrease in sales revenue. When sales go down, and costs stay the same, the company is less profitable, so they have to find a way to maintain profitability by reducing costs. Let’s take look at how this works.
If a company has sales of $100 and costs of $60, then they make a profit of $40. If sales go down to $90 and costs stay the same, the profit is reduced to $30. But if they can reduce their costs to $50, then they still make a profit of $40.
Here are some of the things that companies can do to reduce costs:
- Supplies and materials - sometimes companies can negotiate with their suppliers to pay less for the materials they use to make their products, or for the supplies they use in their offices.
- Freight - manufacturing companies spend a lot of money shipping their products to market. Shipping specialists can often help companies find ways to reduce their freight costs.
- Electricity - Power is usually a large percentage of the costs of a manufacturing operation, especially when they are charged based on their highest level of demand in a given month. By installing monitoring equipment, they can ensure that lights and other equipment are shut off when they approach peak demand, which helps reduce the hourly rate that the company pays for power. (It’s not too different from your parents reminding you to turn off the light when you leave a room.)
- Staffing - One of the main things that companies do to reduce costs is to decrease the size of their workforce by letting some employees go. This is known as “layoffs”. Most companies try to do everything possible to cut costs in other ways before laying off employees.