This post is by Patricia Sigmon, a successful entrepreneur, sought-after speaker and leading expert in profit management. She is founder and president of David Advisory Group, a boutique firm that specializes in helping CEOs and small and midsize businesses re-engineer their business practices to generate profit, cut inefficiency and optimize their earning potential. Her new book is “Six Steps to Creating Profit: A Guide for Small and Mid-Sized Service-Based Businesses.”
Do you want to cut expenses, keep more sales dollars in your company bank account and build a bigger cushion into your operating budget? Don’t have enough time in the day to do the heavy lifting involved in chopping the budget? Don’t know where to begin?
Here’s an easy way to get started trimming your expenses.
First, categorize your expenses
Start by dividing all of your yearly accounts-payable entries into three categories:
- Expenses that are fixed.
- Expenses that depend on sales.
- Expenses that are discretionary.
Fixed expenses. Fixed expenses don’t go away if sales decrease. You have the office, utilities, loans, interest, administrative employees’ costs, insurance, accounting, legal fees, licensing fees, certification fees, auto expenses, taxes, marketing and any other fee that you cannot readily eliminate if your sales hit rock bottom.
Sales-dependent expenses. Sales-dependent expenses represent all labor and costs of goods that are attributed to services or products that you sell. You might need more or less of these expenses, depending on your sales volume. You will also have pre-sales efforts that depend on sales volume, such as auto, travel and entertainment. You might have credit card expenses if invoices are paid to you using a credit card.
Discretionary expenses. Discretionary expenses are exactly that — left to your discretion. You might have a lot of discretionary expenses when times are good, and you might need to cut when times are bad. Look at the cost of entertainment, gifts, training, bonuses, owner benefits and savings. Anything not needed to keep the business open or to produce services or products being sold might be in this discretionary group.
Now, divide and conquer
Once you identify where each expense is categorized, you can focus on the divide-and-conquer part.
Fixed expenses can be left in the controller or bookkeeper’s hands. Every payment you make can be researched for cost effectiveness. Are your office, telephone, Internet, backup, security and freight expenses still competitively priced? Are you paying for the proper insurance coverage? Are you insuring more equipment than you own? Can you outsource marketing and computer services?
Sales-dependent expenses might be best researched and analyzed by project leaders or operational managers. What is your labor-utilization rate? Do you have too many employees for the amount of labor you are performing? Is your shop floor optimized? Is your cost of goods competitive in the market? Can you reduce certain pre-sales costs? Are your job costs put to good use?
Discretionary expenses can be increased or decreased depending on sales volume. Yes, you want that new car; yes, laptops for everyone will be beneficial. But when times are rough, you can hold off on such expenditure. Bonus pools, raises, owner benefits and purchases might have been in the long-term plan, but the long-term plan often needs tweaking.
By tackling your expenses with three viewpoints, confusion about what is “needed” versus what is “wanted” or “normal” goes away, and it is much easier to trim where needed.