In business, there are two primary ways to pursue profit. One is by pulling in more money, the other is by putting out less money. Sometimes you cannot cut an expense item, but you can often get more from it and thus increase your profits. For this reason, you should always use percentages when analyzing expenses rather than actual dollar amounts. For example, if you increase sales and keep the dollar amount of an expense the same, you have decreased that expense as a percentage of sales. When you decrease your cost percentage, you increase your percentage of profit. On the other hand, if your sales volume remains the same, you can increase the percentage of profit by reducing the specific item of expense. Your goal, of course, is to do both — to decrease specific expenses and increase their productive worth at the same time.
Beyond the break-even point, every dollar of sales should earn you an equivalent profit percentage. Remember, once sales pass the break-even point, the fixed expenses percentage goes down as sales volume goes up. Also, the operating profit percentage increases at the same rate as the percentage rate for fixed expenses decreases (provided of course, that variable expenses are kept in line).
The following are five ways to cut your expenses and thus increase your profits.
1. PAY MORE ATTENTION
Rod Jorgensen, Director of Counseling at the Small Business Development Center, quotes the old adage, “If you watch the pennies, the dollars take care of themselves.” Seldom is that more true than in cutting expenses. He recommends that Profit and Loss statements be checked often, starting with the large expense items first, then working down. As you move down the list, look at line items like dues and publications, office expenses, supplies, fuel, and entertainment. “You tend not to spend a lot of time on these,” he says, “because they are small dollar amounts,” but these are the categories where you can nickel and dime yourself into profit, by taking into account their cumulative effects. If you can shave $300 a year off each category, you are looking at a substantial savings. While you don’t want to spend so much time on the smaller categories that you suffer from the law of diminishing returns, you should at least periodically scan the items, to be sure that habit or oversight is not costing you money.
2. COMPARE COSTS
“We’re all creatures of habit,” says Jorgensen, “we say ‘this is how I did it last year, this is how I’ll do it this year.’” This is especially true for busy business people. However, it is this kind of thinking that can keep us paying more than we should. Don’t wait until a crisis to start trimming the fat from your budget.
One of the big dollar items for a business is insurance. Periodically, if not every year, you should shop your insurance around to different agencies and compare quotes. A small percentage in savings here can lead to big dollars added to the bottom line.
Vendors may offer competitive prices as well. Everyone wants your business; find out how much they are willing to offer you in savings. Everything from leasing computer equipment, phone service, vehicle leasing, office supplies, equipment repair contracts, and office space can potentially save you money. Every few years, send your needs out for quotes and compare. Make sure you are getting a fair rate. If customer service has been tremendous, you probably won’t want to change for a small savings. But if you find savings could be significant, you may want to reevaluate your current vendor.
Along those same lines, check what you are paying in credit interest rates and merchant fees. Jorgensen says business owners tend to become comfortable with whomever they are using to process merchant transactions. But a tenth to half a percent of merchant fee savings can have a tremendous impact on your profitability.
Advertising is another potential habitual loser when it comes to expenses. Using the same method of advertising all the time (be it the same radio station or same newspaper ad), assuming nothing in your business or clientele has changed can be dangerous to the bottom line. Advertising expenses as well as patterns should be evaluated yearly or semiannually, according to Jorgensen. Compare agencies for pricing, but also reassess your customer and client base as well. The profile of your customer can change without you even noticing, and if it does, you need to be ready with a different line of attack for your advertising and public relations.
3 — REDUCE WASTE
There are a hundred ways to reduce waste in any given business. From recycling to extended use to quality training to understanding production needs, every business can reduce waste. The question again comes back to the law of diminishing returns. While reducing waste can save a lot of money, it can also cost if too much time is spent. Scan your books, talk to employees, and get productive, but don’t make it time-consuming.
4 — FIND AND KEEP QUALITY EMPLOYEES
Employee turnover and poor training can strangle the bottom line of any company. Jorgensen has heard quotes as high as $50,000 for training an employee to replace one who has been lost. With a job market as tight as that in Nevada, it pays businesses to investigate ways of reducing turnover. This might begin with more attention to screening job applicants, making sure that the people you hire are qualified, well-suited to their positions and fit in with the staff you already have. It is also important to maintain open lines of communications with employees, look for ways to make people feel they are part of your company’s team, and review your benefits package periodically to make sure it is competitive.
When you think of training, you may just think of that initial push to get an employee up to speed in your workplace. But training employees to do more or to multitask, can also increase profit by decreasing costs. If you train a salesclerk to make multiple sales at higher unit prices, you increase productivity without adding dollars to payroll expense. If four sales clerks can be trained to sell the amount previously sold by seven, the payroll can be cut by three salaries. However, just cutting salaries without training, may make the employee feel dumped upon, overwhelmed, and underappreciated. It is important to add compensation for added expectations. It is easier to train an existing employee to do more or be more efficient than it is to train a new employee.
5 — PLAN FOR TAXES
Taxes may come but once a year, but you can plan all year long. Following are a few tips for tax savings:
— Consider setting up a Medical Savings Account, which allows unused contributions to earn interest tax-free.
— Talk to your accountant at the beginning of the year, as well as just prior to tax season, to see how changes in the tax code may affect your filing.
— Put all your small business purchases on a corporate charge card that provides you with regular management reports. This will save you time and money during tax preparation time.
— Keep receipts for holiday gifts purchased for vendors and customers. But remember, you can only deduct gifts valued to $25 per person per year.
— Be sure to open your retirement account (Keogh) before December 31st.
— Purchase any new office equipment you need by December 31st to start taking a deduction this year. If it’s your first year of operation, you may be able to deduct up to $18,000 worth of equipment as a current expense using the first year expense deduction.
— Stock up on office supplies, renew magazine subscriptions, and pay membership organization dues before the end of the year.
— Though everyone likes to get paid, the end of the year is the time to put off receiving income. Try to delay accounts receivable until after the start of the new year. If you can afford to wait and you postpone receiving money owed you until then, you won’t be taxed on it until the next tax year.
Every dollar saved in costs is added right to the bottom line. Learn to maximize your profits by vigorously reviewing business products, processes, and materials for opportunities to lower costs. A key to the effectiveness of your cost-cutting action is the worth of the various expenditures. As long as you know the worth of your expenditures, you can profit by making small improvements in expenses. Keep an open eye and an open mind. It is better to do a spot analysis once a month than to wait several months and then do a detailed study. Take action as soon as possible, and remember you can refine your cost-cutting plans as you go.