How To Lower Your Business Expenses (Part 1)
What would fewer expenses and higher profits mean for your business?
Maybe you would be able to hire more employees and scale up your brand. Or perhaps you could get your business to a place where you could finally take a vacation.
Either way, reducing the costs of operating a business is a goal for every small business owner.
And for small food businesses, there are four main areas that are wide open to cutting costs :
In this two-part series, we’ll take a look at some of the easiest and most cost-effective ways to cut your expenses without compromising on quality, starting with ingredients and packaging.
Lower Your Ingredient Costs
Buy in bulk
One of the easiest ways to reduce your ingredient costs is by buying in bulk. Just like shopping at a warehouse club instead of a conventional grocery store can save you money with your personal shopping, purchasing ingredients in bulk is cheaper in the long run.
Keep in mind, buying in bulk does require a bit more money upfront, but it can pay off big in the long run.
For example, say you manufacture cookies, and your products include flour as one of the main ingredients.
Shopping at a traditional warehouse club (such as Costco or Sam’s Club), you may be looking at anywhere from $6.50-$8.00 for a 25 lb. bag.
At a conventional grocery store, a 5 lb bag of flour may cost you $2.00-$5.00 depending on the brand and quality. Comparing the cost of flour at the two locations, you can already tell that the bulk purchase is a better deal:
Warehouse club: $0.26-$0.32 per lb
Grocery store: $0.40-$1.00 per lb
But while the bulk buy will save you money, in this scenario the initial investment of $6.50-$8.00 is hardly a dealbreaker for most small business.
So what if your ingredients are more specialized and harder to find than flour, or have a higher price point? Is bulk buying still a good investment?
The answer (for most ingredients) is still yes!
While your local warehouse club or restaurant supplier might not always carry the exact brand or quality of ingredients that you’re looking for, online suppliers might just fit the bill.
To get a better idea of how online wholesale suppliers compare to regular retail stores, let’s examine the prices of gourmet pure vanilla extract (which is much more expensive than flour!)
Online supplier: $300 per 1 gallon OR $2.34 per oz
Grocery store: $10 per 2 fl oz OR $5 per oz
As you can see, while the bulk cost of pure vanilla extract may be much higher than the conventional price ($300!), over time the savings are enormous.
Remember though, the more bulk ingredients you may be, the more space you will need to store them.
Don’t buy more than you might need
While buying in bulk may be a great way to save money over time, it can backfire if your ingredients expire before you use them.
Non-perishable ingredients such as flour, sugar, and pasta, have a long shelf life and require no refrigeration, though they may lose flavor or texture over time.
Perishable ingredients, like dairy, meat, and produce, have a much shorter lifespan and need to be refrigerated.
So what if your recipe uses an ingredient like ricotta cheese, which only lasts about 2–4 weeks in the refrigerator until it starts to spoil? If you compare the wholesale to the low volume prices you could be looking at:
Wholesale: $47 per 6 3 lb containers/case OR $2.61/lb
Grocery: $6.50 per 32 oz OR $3.52/lb
So naturally, the bulk ricotta is a better deal than the grocery store purchase right? Not necessarily.
If you have a low volume of orders and can’t use up all of your perishable ingredients, you might end up throwing away a significant amount of ingredients (and quite a bit of your investment).
To keep from wasting ingredients, start out with purchasing smaller amounts of ingredients until you get a better idea of demand.
And remember, even if you run out of ingredients, it’s always possible to buy more!
Lower Your Packaging Costs
Buy in bulk (again!)
Just like you can buy ingredients in bulk, you can purchase packaging supplies in bulk quantities too. In fact, unlike food products, you can buy large amounts of supplies without the risk of them expiring.
Plus, the more supplies you buy, the price per unit usually goes down. Take a look at this quick comparison of 4 different sauce bottles sold by Container and Packaging.
If you know you are going to have a large order coming up, or you already have a high volume of production, this could be considerable savings! And even if you have a lower production volume, purchasing more packaging supplies ahead of time can have a significant impact on your overall expenses.
Just look at the 12 oz glass sauce bottle. Purchasing 96 or more units cuts the cost from $0.67 down to $0.55.
If you are purchasing 50 bottles at a time, 1000 bottles will end up costing $670.
If you purchase 1000 bottles all at once, you would only pay $550.
That’s a savings of $120!
Don’t use your packaging supplies right away
This may seem like a no-brainer, but it’s always a good idea to have empty packaging materials on hand.
Although you may be tempted to manufacture as much of your product as you can (especially if it has a long shelf life), it might be a good idea to hold off on using up all your supplies, especially if you may end up changing your recipe or adding new flavors.
Let’s look again at those sauce bottles.
Say you own a company that produces hot sauces. Hot sauce has (on average) a shelf life of 3 years when opened, and even longer when unopened.
It might make sense to produce and fill all of your sauce bottles immediately just so you can be prepared for any big orders that come in.
Well, imagine down the line you have an idea for a new recipe, yet you’ve used up all of your supplies. Instead of having to go out and buy 1000 new bottles (and labels), keeping a supply of empty packaging always on hand will mean you won’t need to go out and spend more money right away.
Go straight to the source
Whether you purchase your packaging supplies online or instore, chances are you might be buying from a reseller.
Resellers purchase products directly from the manufacturer (like glass jars, boxes, plastic bags, etc.), and sell them to the public at a marked up price. Depending on who you’re purchasing from and what type of product your purchasing, you can be looking at some pretty steep markups.
The benefit to purchasing from a reseller is that the minimum units required to buy tend to be much lower. Whereas some manufacturers may only allow you to purchase units by the hundreds (or even thousands), resellers tend to have little or no minimum requirements, perfect for small businesses.
Additionally, some manufacturers might not even work with small businesses directly unless they feel it will be highly profitable for them.
However, if you can purchase your supplies directly from the manufacturer, it is most often worth it.
If you know who manufactures the supplies you use, try contacting them directly to see if they’re will to work with you.
If you’re unsure, talking to fellow business owners is also another great way to manufacturers or other great packaging deals!
Negotiate with sellers
Negotiating with sellers is not only a great way to get discounts on your purchases, but it also opens up the possibility of different order sizes in the future (even less than the minimum).
The first step to negotiating deals with suppliers is to find a supplier who manufactures or sells packaging supplies you would be happy to use for the foreseeable future. Negotiating is about building a long-term relationship, so if you are unhappy with quality or service try looking for another source.
The next step is to discuss your needs with the seller. If you can show them that you will be bringing them steady business (either with past proof or sales projections), they may be more willing to work out a deal with you.
Transferring all of your business over to a single supplier (as long as they can provide everything you need), is another way to show them that you are serious about working with them long-term.
Keep in mind that not all suppliers can or want to offer discounts, even for ongoing purchases.
In that case, it’s worth a try to see if you can negotiate other deals with them instead, such as a discount for buying in bulk, or lower shipping costs or expedited shipping with no additional charge.
Whichever way you choose to negotiate, keep in mind that this is a seller you will be wanting to do business with for a long time, so form a good relationship and don’t be too demanding!
These are just a few quick (and easy) ways to cut business expenses. If you have any tips or if any of these worked for you, share below!
And remember, keep an eye out for part 2 of this series!