How To Control Expenses
And Increase Profitability
by Tom Egelhoff
If you took a poll of business owners and asked what the most difficult task in running a business is, the almost overwhelming answer would be, how to keep expenses under control. What exactly is a business expense? What is a business investment?
In previous articles I have pointed out that advertising or marketing that works, produces paying customers, and bring in more than it costs, is not an expense, it's an investment. Money is often spent but the profit may not be realized until later.
I can't tell you how many businesses I've worked with who put business cards under office expense. Business cards, letterheads and envelopes actually belong under advertising expense. It's still an expense but it works toward an increase in sales. Staples and paper clips rarely increase the bottom line.
Three Ways To Increase Profitability
There are three major ways to increase the profitability of your business:
- Find a way to increase sales of your products or services without a major increase in advertising or promotion expense. I know this sounds very elementary but many businesses overlook it.
Possible Problem: If you are going to have an in-store sale or business promotion the cost of the promotion can often be more costly than the business the promotion brings in.
Solution: Can you create free publicity in your sales area? Would a local industry expert give a free seminar? Tie your business to a local or national event and alert the media that a special event is taking place. Don't have a sale or promotion just because you haven't had one in a while.
- Raise your prices: If something costs $1.00 and you raise it to $1.10, the entire .10¢ should go to the bottom line. Costs should not have changed unless the supplier raised the price to you.
Problem: Loss of customers due to price increase. Defection of customers if the competition keeps the same price or lowers it.
Solution: Find ways to position your product or service away from your competitor and create greater value in the product. If it's the same brand name as your competitor, make the addition of your company to the sale mix more valuable to the customer. Domino's Pizza© was the first national company to offer 30 minute delivery. Doing business with them, for the same product, was more convenient.
- Decrease your expenses: Any reduction of expenses will always go directly to the bottom line. But, where to cut?
Possible Problem: Common cost cutters are reducing personnel and/or reducing inventory. Both can cost you. Cut personnel and you reduce personal service to customers. Cut inventory and you become known as the store that has to order everything.
Solution: Start at the top. Things like expensive offices, overstuffed chairs and excessive bonuses send the wrong message to employees that excessive spending is OK. Encourage employees to submit cost cutting ideas regularly and reward them with recognition, even if the idea is unusable. Wal-Mart© is a perfect example. Small town businesses hate them but one of their strengths is they encourage employee involvement in the company. The greeter at the front door was an employee suggestion. Wal-Mart's headquarters are in Bentonville, Arkansas compared to the rent J.C.Penny© and Sears© pay in Chicago and Dallas.
The Two Kinds Of Expenses To Control
If you haven't already guessed they are fixed expenses and variable expenses. You'll find these two in any first year accounting book.
Fixed expenses do not change. They are fixed for a specified period of time. Some examples might be; rent, lease expenses, quarterly taxes and insurance.
When I was working with the video companies in San Diego, we would not place a store into a shopping center without a minimum of two months free rent. Rent can be reduced if you are a high traffic draw to the area. We were a high draw as a video store. People came to our stores every few days. The point here is that certain fixed expenses are often negotiable.
Leases are negotiable for length of lease, buyout at the end and other terms and conditions that can reduce expenses.
Insurance can be reduced by adhering to safety directives, security practices and amounts and types of coverage.
Employers were often given a tax break for hiring me because I am a Viet Nam Vet.
Variable expenses do change and can be all over the place from month to month. Variable expenses usually go up and down with sales. More sales, more inventory purchases etc. This is where most of the problems begin. With fixed expenses you know what they are each month. Variable expenses can suddenly put you in the "poor house" in as little as one month. Large payments that seemed doable when the order was placed may suddenly create a drain on resources.
Tip: If your company has a history of expenses over the past three years, list all the variable expenses from those balance sheets. Compute the highest amount paid and the average amount paid for each period and keep it handy. When the bill for that variable expense comes across your desk compare it to the high and low for the corresponding time period. If the amount is out of line, do more investigating. Warning: Do not rely on this method instead of an accountant.
Let's assume you are an employee of your company and you just got paid. On the way home you go to the grocery store, pick up a couple of movies at the video store, get gas and take your spouse out to dinner.
The next day you sit down to pay the bills and realize that you spent too much at the grocery because of impulse buying, you had stuff on tape at home to watch and dinner ended up being more than you planned on. As a result you must put some bills on hold or send partial payments.
Well, businesses often react the same way. The boss assumes the bookkeeper in on top of things and signs all the checks. But he or she doesn't always have a handle on the financial position of the company at every given moment.
It's 10:00 PM. Do You Know Where Your Money Is?
My home town of Bozeman, Montana has become an embezzler's paradise in the past couple of years. We have had at least six people charged and arrested due to embezzlement from their companies. Some amounts as high as $250,000. How many more are out there? Part of the problem is that Montana is 50th in per capita income in the United States. (You can help, Buy my book.)
The point here is that you sometimes want to delegate the unpleasant or boring tasks of bookkeeping to someone else. You assume the bookkeeper is working in your best interest. 99% of the time the employee is absolutely honest but there is still that 1% that some of our local businesses discovered...the hard way.
Cutting expenses means keeping on top of what is happening to your company. We had a company here in Bozeman that could have been saved at one point with as little as $50,000 had the situation been discovered in time. Time went on and the situation was not corrected. When an accountant was finally brought in, and the problem diagnosed, the amount needed to save the company had grown to $150,000...too much for the owners to handle and they went out of business. This business closure could have been prevented with a closer look at the condition of the company by a qualified professional.
My rule of thumb, - the smaller the company, the more you need an accountant. Or at least a qualified bookkeeper. If you've ever had a fish tank, you know that the smaller the tank the fewer mistakes you can make. A minor mistake in a small tank means...dead fish. A major mistake in a large tank means...sick fish.
While your business is in the small tank stage, work with an accountant and find ways to cut expenses and increase profits. Re-negotiate leases, insurance and rent, if possible. Stay abreast of changing tax laws and tax benefits your business may qualify for. Stay on top of variable expenses. Remember, you can't control what you can't see. Have a qualified professional take a closer look at your business on a regular basis.
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Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your Business Or Service In A Small Town, and The Small Town Advertising Handbook: How To Say More And Spend Less. He is also a seminar and workshop presenter and trainer. He may be reached at 888-550-6100 or PO Box 271, Bozeman, MT 59771-0271
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