Improving profitability – Expenses
In previous videos we’ve delved into the three key areas to improving profitability in your business. These three key areas were pointed out to me by my boss nearly 30 years ago and include: Sales, margins and expenses. He explained to me that they should be looked at in that precise order too. If you haven’t checked out the other articles and videos you should do that now. (link to articles?)
Why do we look at our expenses last?
Most businesses have two types of expenses: main expenses (staff costs, vehicle costs and occupancy costs) and minor expenses (for example stationery, telephone etc). Expenses, generally, are the most obvious things to look at, but they can be the hardest to reduce and aren’t likely to improve profitability like sales and margins could.
These are the biggest expenses for the business and the hardest to reduce, typically the largest 3 expenses for a business are:.
Staff expenses – Reducing staff can be expensive; redundancy costs and loss of skills can be costly to your business. It can also make the other employees in the business nervous, wondering, ‘am I going to be next?’
If we’re able to increase the sales in our business, we can fully utilise the staff already in our business that may been under-utilised previously and remove the necessity to reduce employee numbers.
Vehicles – what can we do about vehicles? Yes, we can sell vehicles and we may need to take a ‘hit’ with that and sell them for less than what they’re worth.
Occupancy – the last cost is actually very difficult and expensive to rectify. If you’re leasing premises, you can look at sub-leasing, or, you can relocate; but that means relocation costs – which really add up – not to mention the disruptions to the business. It can cost more than you think!
I always recommend that we leave these minor expenses to last. It’s quite easy to make a dent in them, but in the scheme of things, it’s only a small dent that won’t make a significant impact on the bottom line of the business.
It is important, however, to go through them on a regular basis as (for example) subscriptions change or things that we purchased that we may have been using for a task may no longer be needed. I do this every year. I run a report of all the expenses in my business, go through it line-by-line and ask “am I still using this?” and “is it still delivering value for money?”. If it isn’t, I look at moving or changing the subscription to something that is more appropriate. That helps me keep my business expenses in check.
Remember, firstly, look at sales; if you can’t improve sales, look at margins and then lastly, expenses. If you have any questions, please do not hesitate to contact me.