Exercises to make your business more profitable
This is not going to be the first time you have heard someone suggest that you diminish your expenses during this challenging economy. You may have even heard the old saying of, “If you don’t spend it, you don’t have to make it”.
Your New Year’s resolution was to diminish expenses and you spent a part of that holiday weekend looking at the year to day profit and loss statement and balance sheet. Even when you received the year end statements, you gave them another thorough examination. And as you thought you had completed the task, as we go further into the new year, your feeling today is that you did not make the cuts necessary to make it through the year. There just might not be enough cash to make it through the year.
What are you to do? Try re-examining the year end documents with help from these ideas. The first place we are going to suggest you take a look is at the list of assets on the balance sheet. Of course, there is a list of items that have always been there but now they deserve a closer look.
What about your accounts receivable? Calculate how fast you are collecting the funds by dividing your annual credit sales by the average monthly accounts receivable. An acceptable number is 1.5 times your terms. As an example if your terms are net 30 days, 45 is an acceptable answer. If it is any higher than that, you are likely providing interest free money to your customers.
Another place to look is your inventory which is often your largest asset. To calculate your turn, divide the ‘cost of goods sold’ from your year-end profit and loss statement by the average monthly inventory. Compare your answer for last year to that of several previous years. Is your turn rate improving? If not, a turn rate that is decreasing is often a sign of inventory that is becoming stagnant. It is money that is sitting on a shelf and doing nothing for you.
For our four other areas of concern we want to use the year-end profit and loss statement. The section we want to pay attention to is the operating expenses. This is likely the area you have already closely examined. However, we are going to look at expenses in a different light.
With your year-end profit and loss statement, and a pencil, we want you to make a notation on each row with consideration to the answer to this question; “Is this expense a fixed or a variable amount?”
A fixed expense is one for which the amount does not change from month to month. A variable expense is one for which the amount can be different from one month to the next.
Next to each row of the operating expense section, write in the letter ‘F’ or ‘V’ to represent the appropriate answer.
The next part of the exercise is to again go through the operating expenses and making another notation for each expense, but from a different viewpoint.
Enter the letter ‘U’ for those expenses which are uncontrollable. This means the expense has to happen every month. An example of this would be rent or an electric bill.
The other option for an expense will be the letter ‘C’ which stands for controllable. These are expenses that do not have to happen each month. They are expenses that you have decided to incur. An example of this would be advertising. Another example could be the cellular phone service that you use. You will have to make the decision as to whether an expense is controllable or uncontrollable.
Looking at the year end profit and loss statement after having performed this four step review, you will find that each row will have two letters next to it; there will be a ‘F’ or a ‘V’ as well as a ‘U’ or a ‘C’.
The first combination you want to look for are those with the ‘UF’ notation. These expenses are a fixed amount each month and are uncontrollable. From your exercise you have decided that there is nothing you can do about the expense or the amount of the expense.
However, for all of the other combinations of letters, from the exercise you have determined that the expense, in part or whole, is subject to further review. Some of the expenses are still going to occur, but the amount of the expense is subject to review according to what you have stated. And some expenses are totally subject to review.
Our experience with our coaching clients has been that when the business owner looks at these six issues, they can find more areas to eliminate expenses, and do so with a higher degree of objectivity. Try this exercise to see how you can make sure you are spending only what you have to spend this year.