Where are the hidden savings
Cutting expenses can also increase profits
A teacher of business was frequent in saying, “If you don’t spent it, you don’t have to make it”. Perhaps a bit contrarian to this is another saying of, “You can’t save your way to profit”.
This second saying implies that if you are not producing sales, no amount of expense control can make you profitable. However, as with all sayings, they should be considered for the essence of their message and how you can apply it to your business.
The neat part of working on expenses is that many times the adjustment of controlling an expense can be permanent. There are several easy things that can be examined. Perhaps a first is that of insurance. No matter how much of a good friend your insurance agent is, you should put all of your business insurance out for bid every couple of years.
In that bidding process, make sure that at least one of the insurance companies has a niche of insuring the very products and services you offer. Companies that do not specialize in what you do will often put your business in a “miscellaneous group” which can lead to higher rates.
A second savings in insurance can come in your looking at the coverage section of the policy to see what is covered as a “seasonal adjustment”. Generally speaking, your inventory level likely fluctuates over the course of the year. When a policy is purchased, many owners in answering the question of, “How much inventory”? look to their balance sheet and find the highest amount.
A careful reading of the policy is in order as you many find that it allows for seasonal fluctuations in inventory. As an example, the owner has asked for coverage for $500,000 which is the most inventory stocked over the course of the year. If the policy covers a 20% fluctuation, then a purchase of $420,000 in coverage will take care of that one month where inventory hits $500,000. There could be a sizable savings in premium payment with that difference of $80,000.
All of the examples you could find for your business will come from talking with other owners who have years of experience and have learned of these advantages. However, there is a methodology that you can apply to your business which will get you started in finding places in your business where you can save.
Let’s start with a copy of your income statement or profit and loss statement. As some expenses occur but once a year, we will want a statement from year end so that all of the rows of information will have dollar amounts in them.
This exercise will begin with the first row in the expense section and will continue row by row until we have looked at every expense your business had for the year.
To the left of the name of an expense, you are going to enter either the letter “F” or letter “V”. These initials represent “fixed expenses” and “variable expenses”.
As an example, if you are leasing your building, the appropriate letter will likely be a “F” because the amount of your monthly lease payment remains constant throughout the year. Only when you are able to move your business to another location could the amount change. If you have just signed a five year lease, you cannot do anything about this expense until the lease is up.
Any expense that is not designated by a “F”, has to be have the letter “V” as the opposite of a fixed expense is a variable expense. Continuing with the building example, if you have a mortgage on your building, you will notice that the amount changes from month to month as only the principle part of the mortgage payment is an expense.
What other expenses will you find that are fixed? Perhaps if you use a garbage service, they have a set dollar amount each month they charge you. If you have a contract with someone to handle your social media that charges the same amount each month, this is another “F” expense.
Your electric bill is sure to be a “V” expense, as would any and all other utilities. Hopefully your payroll can be listed as a “V” expense as this means you are increasing and decreasing your staff in accordance with the variances in your revenue.
Give this one last check as every expense has to have a “F” or “V” next to it. And now we are ready for the second part of the exercise. Our second set of letters to be used on all of the expenses are “C” and “U”.
The “U” represents an “uncontrollable” expense meaning that this expense has to happen in your business. The electric bill is again an example to be used as it is going to be hard for your staff to find any of the products you sell or use the machines in your shop without electricity.
The “C” represents the opposite, or “controllable” expenses, meaning you decide if this expense is necessary for your business. Most businesses owners now carry a cell phone with them; this in addition to the land lines in the shop. We probably think this is a necessary expense so that our staff can get in touch with us when necessary. If so, how did our staff handle situations before the mid 1970’s when we did not have a cell phone?
Again, every expense now has a “C” or “U” next to them in addition to the “F” or “V” we placed in the first exercise. We are looking for the combination of “UF” which represents expenses that are “Uncontrollable Fixed” amounts. By your own definition, you have determined there is nothing that can be done about this line of expense.
All of the other expenses, in part or in whole can be either eliminated or diminished. Experience has shown that when you approach the expense section of the income statement with a cold and impersonal look such as this four letter exercise, you will quickly get to areas of your business that may be creating too much drag on your profitability.
And once you have gone through this exercise of identification and made the necessary changes, let’s get back to seeing what we can do to increase revenue and margins.