With geopolitical crises, economic downturns, high energy prices and a tight labour market, many German businesses are currently under significant economic pressure. This has made cost reduction an important factor in running a competitive business. Taking the appropriate actions can provide short-term relief and ensure financial stability in the future.

In this article, we explain cost reduction and its contribution to improved international competitiveness for German businesses. We also look at various measures that can reduce costs in specific business areas.

What's in this article?

• What is cost reduction?
  
• Why is cost reduction important for German businesses?
  
• How can cost reduction improve the financial stability of German businesses?
  
• What are some cost reduction measures for businesses?
  
• In what areas can businesses cut costs?
  

What is cost reduction?

Cost reduction includes any measure that aims to reduce a business' operating expenses. Reducing expenses usually focuses on cost centres or cost bearers that are considered inefficient, excessive or unnecessary. In financial terms, a cost reduction is an improvement in earnings on the expense side of the income statement. Businesses can reduce costs by cutting down on variable costs (e.g. materials, energy) and fixed costs (e.g. rent, staff).

Cost reduction can be proactive (e.g. as part of corporate development). It can also take place in response to external influences, such as changing market conditions. In either case, practising cost reduction has three key objectives:

• Improve profitability
  
• Strengthen competitiveness
  
• Increase profit margins
  

Targeted cost reduction also contributes significantly to financial resilience – the ability of a business to withstand economic stress and adapt to new challenges.

Cost reduction is often confused with cost efficiency, but these two terms are not interchangeable. Cost efficiency primarily focuses on improving the relationship between the available resources and final product, not on lowering expenses.

Why is cost reduction important for German businesses?

Cost reduction can be important for German businesses for several reasons. It is important as a necessary response to global or country-specific challenges. It is also an opportunity to strengthen a business' position and make it more future-ready.

Global challenges

The international landscape has changed significantly in recent years and has become considerably more challenging and competitive for German businesses. In particular, growing price pressure from competitors in China has caused significant strain on many businesses.

According to a survey by the German Economic Institute, 78% of German businesses surveyed reported that Chinese competitors offer comparable products at significantly lower prices. As a result, businesses in Germany have to accept shrinking sales figures or reduce their margins. This can lead to lower revenues and a possible need to cut costs.

At the same time, technological advances are increasing the pressure for change in many industries. For example, the rise of AI has led to massive changes in business processes. According to a study by Bitkom, 42% of German industrial businesses are already using AI to refine processes and increase production efficiency. These developments can lead to questions about existing business models, strategies and processes. As a result, businesses might also need to adjust costs.

International tensions place additional strain. A study by the Deutsche Bundesbank shows that geopolitical risks in trading partner countries can lead to higher import costs and disrupted supply processes. These factors can, in turn, require German businesses to take cost reduction measures.

Challenges in Germany

International developments, as well as increasing cost pressure within the country, pose economic challenges for German businesses. Germany has some of the highest energy costs in the world, for example.

Demographic change is also creating a shortage of skilled workers in Germany, which has become an ongoing problem. According to the German Economic Institute, there could be a shortage of 728,000 skilled workers by 2027. As a result of such labour issues, businesses might have to pay higher salaries, create additional incentives or finance extensive recruitment and training measures.

With social and political emphases on sustainability, businesses are increasingly expected to be conscious of how their actions impact both the environment and climate. Even if the associated measures can bring long-term competitive advantages, they involve additional financial burdens up front. German businesses might have to counteract this by cutting costs elsewhere.

Opportunities in domestic and foreign markets

German businesses that reduce costs could gain important advantages in the domestic and foreign markets, including increased profits and improved market position. Additional financial resources can also create opportunities for investment, improvement and growth. Therefore, cost reductions are beneficial for the status quo and for the future viability of businesses.

How can cost reduction improve the financial stability of German businesses?

Reducing costs can improve a business' financial stability in several ways. Here is an overview of the most important ones:

Increased profit

The most immediate result of cost reduction is typically a higher profit margin. When a business reduces its operating expenses without reducing sales, profits naturally increase. This additional profit can be used to improve the equity ratio.

Financing options

Banks and investors tend to have more confidence in businesses with higher equity ratios because they reduce a business' dependence on borrowing. This improves a business' creditworthiness and opens up more favourable financing options. Consistent cost management is effective both internally and externally. Businesses that systematically and transparently reduce expenses increase their attractiveness to external investors.

Increased liquidity

Lower costs mean more available resources. By reducing costs, businesses can improve their solvency in the short term. This means ongoing liabilities – such as wages, rent or supplier invoices – can be paid reliably. It also becomes easier to create buffers for unplanned expenses, such as repairs or recalls.

Resilience

Cost reductions can increase a business' level of resilience. This is especially true of reduced costs for fixed expenses, such as rent, insurance or ongoing service contracts. A lean cost structure allows a business to react more quickly to drops in sales or changing market conditions.

Operational efficiency

Targeted cost-cutting measures often identify and improve inefficient processes. Whether it be through automation, process refinement or outsourcing, having more efficient operations saves money and increases productivity. This can also lead to a better market position in the long term, as the business can react more quickly and flexibly to customer needs and market developments.

What are some cost reduction measures for businesses?

Here are some of the cost-cutting measures for businesses in Germany:

Be transparent about costs

Before savings are possible, businesses must first know how and why they are spending money. The first step towards a more efficient cost structure is systematically recording and analysing all business costs. This includes, among other things, allocating costs to specific locations and processes, identifying cost bearers and observing trends and fluctuations. Savings potential can only be identified if it is clear where and how costs arise (e.g. through redundant processes, oversized budgets or under-used resources).

Improve processes

Avoidable operating costs arise from inefficient processes, among other things. As a result, one effective measure to reduce costs is process refinement. Look into specific workflows that can be eliminated, simplified or restructured to avoid wasted time, unnecessary steps or duplicate responsibilities. Using digital tools can also help improve processes.

Use resources efficiently

One often underestimated potential for cost reduction lies in the handling of operational resources – from machines and vehicles, to office space or digital tools. Businesses can reduce waste and save on costs by planning, monitoring and sharing resources more carefully. For example, improved maintenance planning can help avoid unnecessary breakdowns and repair costs and shared equipment can help reduce investment costs. It's also worth looking at existing materials and technologies. Often, new applications can be developed that create added value without incurring new expenditures.

Reduce staff costs

Staff costs are the largest cost factor for most businesses. At the same time, saving on these costs requires particular sensitivity. Consider placing some workers on part-time schedules, rather than laying them off. This could help maintain a cohesive culture within the workplace and minimise any effects to employee morale.

Reduce material costs in purchasing

In many businesses, material costs make up a significant portion of total costs. Savings can be achieved through targeted improvements to procurement processes. For example, it's important to build long-term partnerships with reliable and affordable suppliers. Bundling orders and switching to cheaper – but equivalent – materials can also be worthwhile.

Reduce energy costs

The high energy costs in Germany are a significant burden, particularly for businesses in energy-intensive industries. This makes reducing energy costs a particularly prominent way to reduce overall costs. Using energy-efficient devices and smart control systems can reduce energy consumption in the short term. In the medium and long term, investing in renewable energies – such as through solar energy systems or the use of waste heat – can pay off for businesses.

Refine marketing and sales costs

It's also worthwhile taking a look at the resources your business uses in marketing and sales. Digital channels – such as social media, email marketing or targeted search engine advertising – generally offer more cost-effective alternatives to traditional advertising measures. In sales, costs can be reduced through refined sales channels, digital self-service offerings or cooperation with partners in specific markets.

Outsource services

Outsourcing can be an effective way to reduce costs, especially when specialised providers can perform certain tasks more efficiently or at a lower cost. Businesses should carefully examine which areas are suitable for outsourcing. Common examples of services that can be outsourced are information technology (IT) services, payroll accounting and customer support.

Instill cost awareness in the workforce

Cost-reduction measures only have a meaningful impact if they're supported throughout the business. Managers and employees should have heightened cost awareness as the business works to reduce costs. It's a good idea to implement training sessions and provide regular information on your business' savings targets and successes. You can also provide workers with incentives for cost reduction.

In what areas can businesses cut costs?

Cost reduction is possible in practically all areas of German businesses. Here are a few examples:

Accounting

Digitalising and automating accounting processes can considerably reduce costs for German businesses. Modern tools can make routine tasks more efficient, such as tax calculation, invoicing or sales posting.

For example, Stripe Tax calculates country-specific tax rates, collects them correctly and provides you with all the necessary documents for tax rebates or audits. Stripe Invoicing makes automated invoicing possible. You can send invoices online in just a few clicks. Stripe Revenue Recognition automates the accounting of transactions on an accrual basis. This enables you to record revenues in accordance with regulations, correctly calculate reserves and get monthly statements faster. This reduces the risk of accounting errors and saves valuable working hours.

Production

Many cost-cutting measures are possible in production, especially through more efficient processes, targeted use of modern technologies and forward-looking resource planning. For example, businesses can use lean management approaches to minimise waste, shorten setup times or improve facility use. Modern manufacturing technologies can also help avoid downtime and reduce material costs. Businesses that regularly analyse and continuously improve production processes can reduce costs and increase quality, delivery reliability and competitiveness.

Purchasing

Purchasing often determines a business' level of competitiveness, as businesses can reduce costs before adding value. Establishing long-term supply partnerships and bundling orders can significantly lower your purchasing prices.

Human resources (HR)

Targeted measures can also reduce costs in HR. Digitalising HR processes can create savings potential. Automated platforms for time sheets, payroll and onboarding can reduce administrative efforts and lower staff costs in the long term.

Security

Security measures are necessary expenses and thoughtful implementation can help reduce operational costs. In the area of fraud prevention, early detection can help a business minimise damages and prevent significant financial losses. Failed transactions, chargebacks and audits or legal disputes can cause businesses to rack up direct costs and tie up HR.

With modern solutions such as Stripe Radar, businesses can detect and automatically block fraud attempts in real time. Radar uses machine learning and millions of instances of transaction data to reliably identify suspicious activity. This can reduce the risk of payment defaults and return debits and save effort on manual checks. In this sense, security measures become an active component of a comprehensive and efficient cost reduction strategy.

Expansion

International expansion often requires significant investments, such as those in payment infrastructure, tax compliance or payout processes. Using integrated solutions – such as Stripe Connect – can significantly reduce these costs. With Connect, you can build a scalable business in no time and automatically meet country-specific requirements: from value-added tax (VAT) calculation to local payment methods and integrated partner accounts. This shortens the time to market, minimises administration costs and allows platforms such as traditional businesses to enter new markets quickly and with cost efficiency.