As a small business owner, there's no time like the present to cut costs. When business is good, cost-cutting makes a favorable cash situation even better. And when business is bad, cost-cutting helps you make better use of what capital you do have readily available. Mere penny-pinching measures won't do the job, however. You must make a regular practice of looking for pockets of waste among the "cost drivers" - the activities that influence the spending of money in your company. To analyze where you can begin to cut costs in your business, consider the following areas as a starting point.

Product Lines

The old business adage that 80 percent of your profits come from 20 percent of your products holds true. It is worthwhile, therefore, to evaluate your offerings on a regular basis to determine which ones are pulling in revenue - and which ones are draining it. While many of your lesser-performing products may be candidates for the trash pile, deciding which ones to drop can be tricky because cost-accounting information often disguises the way that each product actually drives company costs.

When evaluating your product line, ask yourself the following questions: Which products drive overhead and marketing costs? Which cause inventory to bloat? Do prices adequately cover these costs? If you drop the major cost drivers, would their overhead costs actually go away? Do you have more profitable products in which to invest your scarce resources?

Poor Quality

More than any other cost driver, poor quality is a deadly virus that can infect an entire company. The obvious problem is the direct cost of failures: the product that must be corrected, or the job that takes twice the time that it should. But soon, waste infects other parts of the company as more and more employees work full-time on problems - making long-distance phone calls, expediting deliveries, processing corrected paperwork, and apologizing to customers. Soon, more managers have to get involved to streamline the error-correction process. As the problems multiply, they become obvious to customers, who stop buying, and to vendors, who tighten credit terms in fear that the company won't survive.

The only way to control this cost driver is to employ a strict quality control process for every product and service that leaves your office.

Positions

Every position in a company is a cost driver. Upon careful examination, you may find that some of them are unnecessary hindrances to your company's success. Several years ago, for example, I was vice president of finance for a small manufacturing company in desperate need of a financial turnaround. To raise cash and cut costs, we sold our manufacturing plant and then purchased our product from private-label manufacturers. With only 10 employees remaining in the company and no manufacturing plant, the firm didn't need a vice president of finance, so I fired myself.

When evaluating the cost drivers in your own company, look at each person's job objectively. Do the pay, position and person match up profitably? If not, the answer may not be to fire that person but to redirect his or her efforts elsewhere.

Policies and Procedures

Inefficient policies and procedures can also cause costs to skyrocket. A small business owner told me how a recent change in his company's procedures had a dramatic affect on its costs. For years, his salespeople had been required to submit a detailed report for each sales call they made. He found that half of his sales staff's workday was being spent completing the reports. When the owner simplified his reporting requirements, the salespeople could spend nearly twice as much time selling. This change effectively doubled the size of the sales force and cut the cost-per-call in half.

Evaluate your own company's procedures for wastefulness, and try to identify ways to eliminate it. First, determine ways to reduce the number of transactions required for your policies, which will in turn reduce the overhead costs needed to process them. Second, search for ways to make each transaction less time-consuming, allowing the same number of people to perform more procedures.

Management Perspective

"We don't need this machine (or employee or building) yet," I've heard managers of fast-growing companies say, "but it's available now at a bargain. Let's get it." This common attitude causes at least three problems. First, it consumes resources today that are needed in other areas to achieve a successful future. Second, when the resource is needed, last year's bargain often turns out to be the wrong size or model. And third, the bargain purchase may never be needed in any case, and therefore becomes a total waste of money.

To address these problems, carefully evaluate all capital expenses before making them. The best policy is if your company doesn't have an immediate need to make the purchase, hold off until it does.

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