As a business owner, you spend a great deal of time thinking about the amount of profit that you will make in the current month, quarter or year. We already know signing new customers and increasing the volume of business from existing clients is an excellent way to boost profits, but many overlook the benefits of cutting costs.
If your top-line revenue is increasing and your net income is growing as well, that’s great. But is the rise in your company’s profit in proportion to your sales growth?
"Increasing revenue is an excellent way to boost profits, but many overlook the benefits of cutting costs."
Here's what we mean: Consider the example of a business owner who has yearly revenues of $1 million and a net income of $100,000. If sales grow to $1.5 million, and you can maintain your level of profitability, your earnings should rise to $150,000. (Adjust for your income & profit margin – if you know it!) Unfortunately, rising revenues often make a business owner complacent. You may start adding expenses that don’t contribute to your bottom line, and you could find yourself in a situation where your company’s profits are at a sub-optimal level. Data shows this is likely to happen when your revenues and earnings are rising.
So how can you ensure that you don’t lose sight of expenses when your business is doing well? Here are four steps that can help to reduce costs:
4 Ways to Reduce Costs
- Periodically review employee costs
Employee expenses are usually looked upon as fixed costs. While that’s true to a great extent, there is often scope to cut down on necessary expenses. For example, when you have to replace an office computer, you don’t need to opt for the most expensive model. If you think about it, there could be several ways in which to trim costs without harming your business interests. Look at telecommuting or a four-day work week seriously. These could help you to lower expenses and improve employee morale at the same time.
- Reduce paper usage
This is possibly a more challenging task for State Farm Agents; however, paper costs and the expenses associated with paper usage can quickly add up to a sizable sum. When you use paper, you may also need to spend on printers, ink, storage, and mailing costs. Not to mention the extra time that employees take to file the pages that they print and look for misplaced printouts. One easy way to cut down on paper-related expenses is to print on both sides or move as many aspects of your business to paperless operations.
- Pay invoices early
Many vendors offer a cash discount if you pay early. Ask if “2/10 Net 30” is available when you purchase on credit. This term means that you get a discount of 2% if you pay within ten days. If your payment is made in the period from day 11 to day 30, you won’t be eligible for the discount.
- Cut marketing costs that you can’t attribute to a return (ROI)
An evergreen maxim that is often wrongly attributed to John Wanamaker, the “pioneer of marketing,” is, “half the money I spend on advertising is wasted: the trouble is I don’t know which half.” You probably don’t either. But you should make an effort to continually review your marketing expenditure and reduce or eliminate the expenses that don’t seem to be yielding any results. An easy way to do this is by looking at the monthly reports we provide you. In the marketing section, find the types of marketing you're spending money on and notate the correlation they have to revenue growth. If you a positive correlation, keep it up. If you don't, adjust your spending accordingly.
The bottom line
Remember that adding expenses is easy, but cutting down on costs can be more difficult. When business is good, many entrepreneurs tend to focus on profits rather than their profit margin. The first is an absolute number or the dollar profit that your company is making. Your profit margin, on the other hand, is a percentage of your sales. Monitor your profit margin carefully. This will remind you to keep your expenses in check. Containing your costs will enhance your profits in good times and also give your business the resilience to survive in a downturn.