Cut Expenses
Few things can do more to increase your net profitability — particularly over the short term — than trimming unnecessary expenses. Case in point:
- Let’s say your net profit before taxes on the typical equipment sale ranges between five and ten percent. (That’s what you keep after you not only pay for the merchandise, but also for expenses such as salaries, commissions, rent, lighting, heating, air conditioning, insurance, telephone, etc.)
- Let’s also say that your goal is to increase this month’s net profit by $1,000.
To achieve your goal you have two choices: You can either reduce expenses by $1,000, or increase sales to the point where your net profit before taxes goes up by $1,000. Which is easier?
Let’s say you budget one hour of your time to reducing expenses by $1,000. Can you do it? Unless you’ve recently been through a round of cost cutting, odds are the answer is yes. Some examples of how you might accomplish this could include:
Beware the Pitfalls of False Economy
When trimming expenses, it’s important to temper your decision making with a healthy dose of common sense.
We’ve all heard the story of the store owner who told his ad sales rep he was cutting his advertising expenses because he’d heard the economy was getting bad. Guess what? As soon as he eliminated his advertising budget, that’s exactly what happened…to him.
What cutting expenses, pay particularly close attention to its effect on morale. Make sure your staff understands what you are doing, why you are doing it and how it will benefit them in the long run. The last thing you can afford is a series of budget cuts so demoralizing that it takes away your employees’ incentive to produce (i.e., “Now that our commission is reduced, why bother?”).
Remember also that “cheap” doesn’t necessarily mean “economical.” We once saved a couple of dollars by buying the cheapest available trash bags. The problem was, they were so cheap it took our staff several minutes each to get the damn things open. By the time we’d gone through the entire box, the two dollars we’d saved ended up costing us several times as much in wasted man hours.
- Adjusting your thermostat to reduce heating/cooling expenses.
- Implementing a telephone use policy designed to decrease your monthly phone bill.
- Cutting back on staff overtime or part-time employee hours to reduce payroll expenses.
- Eliminating advertising and promotional expenses that have not proven to pay for themselves.
The longer it has been since you last evaluated the return you get on these outlays, the more likely it is you will find ways to save money.
In contrast, increasing sales to achieve the same increase in profitability is likely to require a lot more work. For example:
- If your net profit before taxes on product sales (what is left after you deduct the cost of merchandise, rent, utilities, salaries, commissions, insurance, etc.) is ten percent, you will need to increase product sales by $10,000 this month to result in a $1,000 increases in profits.
- If your net profit before taxes on sales is just five percent, you will need to increase this month’s sales by $20,000 to achieve the same result.
Assuming you are already doing everything you can to maximize sales, your odds of getting and additional $10,000 to $20,000 are fairly slim. In contrast, cutting expenses by $1,000 can be comparatively easy.
::: TOP ::: SUBSCRIBE ::: CONTACT US ::: ABOUT US :::