The reduction of specific fixed and variable expenses can improve your profit picture.
First a word of caution. Do not needlessly cut costs. Legitimate expenses provide the
framework for your business and you don’t want to cut your operating budget too
deeply. However, you must be ever vigilant when it comes to controlling expenses. Each
year, expenses have a way of creeping skywards. It is up to you, to evaluate if those
funds are being spent for their maximum effect.
You can reduce costs without cutting specific expenses by increasing the average sale
per customer. If you can increase the overall value of a sale to each customer, you then
spread the same expense across a larger income. This gives you a better sales vs. expense
ratio. If you operate in a retail store, you may measure sales per square foot. Your goal
may be to increase the sales per square foot by certain percentage. Look to sales as a way
to improve the success of your business. Beyond offer quality products and services, it is
the sale of those goods and services that keep you in business.
Keep in mind that you need to build in a solid profit margin on sales. A big sales
volume with a thin profit margin is not the solution you seek. A part of your product or
service line may have a smaller profit margin simply because of competition and market
pressure. If that is the case, then you must add a higher profit margin to other goods, so
you can obtain an average profit margin, which meets your business goals.
Your goals is to pay the right price for prosperity. Evaluate expenses and look at
areas that may be high or rising at a rapid rate. Look at how expenses are distributed
from year to year and identify areas for review. Review each segment of your operating
budget. Can you negotiate a better lease? Can you renegotiate a long-term debt at a better
rate? Can you earn discounts by meeting accounts payable earlier in the payment cycle? Can
you cut specific costs for specific time frames in order to reduce overall expenses? Ask
yourself these and other questions.
Before you can determine if cost cutting will increase profits, you need more
information about your business operation. Proper record keeping is the start. Your
business records provide the financial data to prepare a budget, profit and loss
statement, break-even calculations and operating ratios. This information can be compare
with similar types of businesses to evaluate if your business is operating within industry
norms. A break-even analysis will show you the volume point at which your gross profit
equals expenses. From that point on, you begin to move from a loss into a profit
situation. The break-even point is a very important piece of information to you as a
business owner.
To learn more about controlling costs, increasing sells, improving profit margins and
managing profitably, contact the SCORE Association (Service Corps of Retired Executives).
More than 12,000 volunteer business counselors donate their time as business counselors
and mentors of entrepreneurs. SCORE is a nonprofit association that provides free and
confidential business counseling to America’s small business owners. Call 1 (800)
634-0245, for a referral to the SCORE chapter nearest you.
