By Mary Goodman and Rich Russakoff | May 27, 2011
In our last two posts, we showed you that when it comes to your business’s finances, 1+1+1 can truly equal 19. Once you pay for your overhead, every change you make affects your bottom line: All price increases and expense reductions — even changes as small as 1% — go directly to your net profit.
We showed you how to increase prices by 1% without adversely impacting sales and how to bring down your cost of goods by 1%. This week, we’ll discuss how to achieve a 1% decrease in your other costs — in other words, sales, general, and administrative.
Strategy #1: Fixed isn’t always fixed
Just because it’s not a variable expense doesn’t mean that it won’t vary. Communication costs, credit cars fees, and insurance are easy pickings. Even rent: Companies that signed leases at the top of the market have been able to renegotiate their rent as prices fell. The 3 most powerful letters in the English language are A-S-K.
A little homework goes a long way. Start by creating a hit list: Sort your expenses from biggest to smallest and whittle away from the top down. Check prices from multiple vendors, brokers, realtors, etc.
Strategy #2: Always separate overtime pay from regular wages
When we first put this into place with one business, we discovered $60,000 in overtime over three months. It originally went undiscovered because it was attributed to adding staff and annual raises. Further investigation revealed that the bulk of it was paid to the bookkeeper and his family members.
Establish targets or ranges for payroll and overtime pay. Compare actual to projected, as well as to the prior period.
Strategy #3: Examine commissions and expense accounts
Are your sales people collecting their commissions before you collect? Do you have uncollected receivables on which you’ve already paid commissions?
Look at both when and how commissions are paid. You get the behavior you reward — what behavior are you incentivizing?
Establish clear parameters for sales expense reimbursement. First determine the strategic value of the expense — lunches, travel, entertainment, etc. Then audit. Don’t rubber-stamp the reimbursement! Check for errors and policy compliance.
Strategy #4: Eliminate empty calorie spending
Waste is expensive. With 10% bottom line profit, $1000 unnecessarily or overspent requires an additional $10,000 in sales.
Here are some examples from our hall of shame: Cell phones for employees who had left the company, licenses and subscriptions for things no longer used, and easily avoidable late fees and finance charges.
You can meet this challenge through systematic re-examination of expenses. Pick one per week or a couple per month and ask these 3 questions:
- Is it necessary?
- Is there a better option?
- Can we accomplish the same objective less expensively?
One California business we worked with slashed their mailing costs by thousands of dollars by using two-day instead of overnight delivery for 90 percent of their packages.
Strategy #5: Make one person accountable
Four different employees each thought they were in charge of ordering toilet paper for a large retail store. Guess what? They had no room for inventory, but a lifetime supply of TP.
The lesson? Centralize your purchasing. When everyone is responsible, no one is accountable. By designating one person or department directly responsible for expense management, you can turn it into a profit center.
All of these suggestions can easily lead to a significant savings in your expenses. Even just one, will greatly add to your bottom line. After all, you are only looking for 1%.