What to do with cost savings: reinvest, keep or pass on?

Key takeaways

Deciding what to do with cost savings is as important as finding them. A saving has five possible uses: build a cash reserve, reinvest in growth, improve the product or service, lower prices, or take it as profit. Decide before the saving arrives. Unallocated savings, and especially freed-up hours, are absorbed by the business within months.

• 5 uses: reserve, growth, quality, price or profit.
• Decide the split before the saving lands.
• Freed-up hours vanish unless they are given a job.
• Build a cash reserve first if you have under three months of costs.

Why does the decision need making at all?

The decision needs making because savings with no destination leak. Money left in the current account funds small upgrades nobody planned. Hours released from admin fill with email and meetings. Six months on, the cost base is lower and nothing else has changed. A saving is only worth what it is turned into.

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What are the five uses?

Each use suits a different position. Most businesses split a saving across two or three.

• Reserve: build cash to cover slow months and shocks.
• Growth: fund sales, marketing or a new service.
• Quality: improve response times, product or training.
• Price: pass some on to win or keep customers.
• Profit: pay down debt or pay the owners.

• Cut costs or grow revenue: which should come first?

How do you decide?

Decide by asking what limits the business today. If one bad month would cause real trouble, the answer is reserve. If demand exists and capacity or visibility is the limit, it is growth. If customers are leaving over service, it is quality. If price is losing you work, it is price.

• 1. How many months of costs do we hold in cash?
• 2. What is stopping us growing right now?
• 3. Why do customers leave or not buy?
• 4. What return would each use give in a year?

• How to find the bottleneck that is capping your growth
• How to set cost reduction targets your team can hit

What does a worked split look like?

Take an illustrative firm that has cut operating costs by £30,000 a year and holds one month of costs in cash. It puts £12,000 into reserve for the first year, £12,000 into marketing that has a measured return, and £6,000 into staff training. From year two, the reserve portion moves to growth.

It has also released 20 hours a week of the owner's time. Those hours are assigned in the diary: 12 to sales calls and 8 to supervising delivery. Without that step, they would have gone.

• Reserve: £12,000 in year one.
• Marketing with a measured return: £12,000.
• Training: £6,000.
• Owner hours: 12 to sales, 8 to delivery.

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What about the hours, not the money?

Hours are the harder half. Across our client work, owners have got 31 hours a week back, and what happens next depends on whether those hours were given a purpose. Write down what each released person will now do, put it in their diary, and review it after a month.

For staff, this is also the honest answer to what outsourcing means for them: here is the more valuable work you will be doing instead.

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When should savings go to customers?

Savings should go to customers when price is the reason you are losing work, or when a competitor is about to make the same efficiency gain. Otherwise, improving service usually does more for retention than a small price cut, and is harder for rivals to copy.

• How to cut costs without hurting customer service

What does this look like in practice?

A pattern we see a year after a successful cost project: the owner agrees the saving was real and cannot point to what it bought. The business is a little more comfortable and otherwise the same. Firms that named the destination in advance can show a reserve, a campaign or a new hire that the saving paid for.

• See client work
• BPO Solutions for UK businesses

Reinvestment checklist

Complete this when a saving is confirmed.

• The saving is stated as a recurring annual figure.
• Cash reserve is measured in months of costs.
• The main limit on the business is named.
• The saving is split across named uses.
• Released hours are assigned in diaries.
• The result is reviewed after 90 days.

• A 90-day plan to reduce operational costs
• Cost reduction KPIs: the numbers that prove savings are real

Next step

Tell us what you have saved or expect to save, in money and in hours, and what is holding the business back. We will help you decide where each should go.