February 24, 2024

Small Business Advice

Practical exercises to help reduce costs, raise profits

Jerry Osteryoung | 3/24/2017

"If the doors of perception were cleansed everything would appear to man as it is, Infinite. For man has closed himself up, till he sees all things thro' narrow chinks of his cavern."

~ William Blake

Just about every business wants to improve profits and do it quickly. There are three methods of accomplishing this: increasing revenue, reducing costs, and increasing revenues and reducing costs.

Of the three methods, reducing costs is the easiest and most effective, as every dollar you save hits the bottom line. When increasing revenue, however, only a small percentage of that increase hits the bottom line because there are costs associated with revenue.

Imagine, for example, I have sales of $1 million with a 10% net income margin (net income divided by sales). If I reduce my costs by $100,000, my profit increases by $100,000. If I increase sales by $100,000, only 10% of that, or $10,000, hits my bottom line. If I do both, my profits increase by $110,000.

I believe almost every business can easily shave 10% to 15% of its costs just by looking at each individually and seeing if it can be reduced by rebidding or renegotiating with suppliers. Too often, firms keep buying from the same supplier because they develop a relationship and trust. However, you cannot allow this to get in the way of operating your business with better cost controls. I see this happening with insurance costs most often.

I was working with a firm that had not reevaluated its insurance costs in over 10 years. When they went to their existing insurance agent, he was able to reduce the cost by over $10,000, but when they went to other insurance agents, they were able to get the cost down by over $20,000 with the same coverage. The point here is that, while relationships are important, the success of your business is even more important.

Labor costs are another area where businesses can find expense reductions. Clearly, you are not trying to hurt anyone by letting them go, but you have an obligation to ensure your business is sustainable. That means watching your labor costs carefully.

So how do you know if your labor costs are too much? One way to evaluate this is to compare your staff salaries to those of other similar companies. You do not need to consider cutting anyone’s salary, but rather see if you need to put caps on positions.

Businesses often continue rewarding their loyal workers with salary increases every year, and this can get out of hand quickly. One firm I was working with was paying an office manager $150,000 a year because she had been there so long, and they considered her part of the family.

After doing further research, they found that the maximum fair salary for that position is around $75,000. This firm did not feel that they wanted to do anything about this employee, but they knew that when she left the company, the position would have a salary cap. They established salary caps for all their positions.

A second way to evaluate your overall labor expense is revenue per employee. If the revenue per employee for your business is $130,000, and the industry average is $200,000, you really need to investigate why yours is lower and see if you can bring it up by reducing some of your labor costs.

Now go out and look at every single expense each year to find ways to reduce your costs and raise your profits. This is an easy exercise that produces so many rewards.

You can do this!

Dr. Osteryoung has directly has assisted over 3,000 firms. He is the Jim Moran Professor of Entrepreneurship (Emeritus) and Professor of Finance (Emeritus) at Florida State University. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book co-authored with Tim O'Brien, "If You Have Employees, You Really Need This Book," is a bestseller on Amazon.com. He can be reached by e-mail at jerry.osteryoung@gmail.com.

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