Much of your focus as a business owner is directed towards the activities that form the basis of your enterprise and marketing them to potential customers. You have your eye on the bottom line and work hard to improve your profitability, and that’s the job of business. There are many factors that can impact your profits, and to maximize your profitability you need to have a strategy for monitoring all these influential elements.
If you concentrate on revenue but are exceeding your marketing budget, the extra income may not be sufficient to cover the extra expense, or if you focus on profit margins to make maximum returns on your sales, you can be bringing more in with one hand but then passing it over with the other because you haven’t been checking what you’re spending on utilities.
Get planning.
To keep track of all your expenditure and the effect this is having on your profits, you need to have a plan that details every facet of your business and the costs each incurs. You should have included all your overheads and running costs in your original business plan, so revisit it and see how your predictions have turned out. Compare the budget you set for each expense against the accounts figures for that cost area. Make sure you allow for any difference in revenue between what was predicted in your plan and what you are taking in reality.
If your expenses are higher than you budgeted for, you need to know how much of that is due to a higher than expected income. If you’re selling 10,000 more units than you expected, the cost of purchasing the products will be increased as well. It’s not much use working out costs and comparing them to budgets unless you calculate the net percentage increase or decrease.
Similarly, if you are underspending against your budget, is it because your sales are lower than expected, and if so why? Instead of feeling pleased you’re under budget, you should be looking at why – is it that you’re not getting enough products in, and thus have understocking issues? It’s entirely possible that you should be spending more, i.e. buying more stock so that you never run out and lose sales as a consequence.
Get the infrastructure sorted.
Once you have a monitoring plan in place, you need to look at how you can reduce spending in areas that are costing you money, and the buildings, machinery and facilities are the best places to start. If you have high electricity bills for your offices, find out why. Are your staff leaving the heating on and opening the windows when it gets too hot? Are they leaving lights and electrical equipment turned on or on standby when they’re not in use? Your building might be poorly insulated, which means you are using far more energy on heating than you need to. Get the answers to these questions, and you will be able to assess how best to deal with these issues. You might want to install motion-activated lighting systems so that lights aren’t left on when not required. You could investigate the benefits of modern insulation, or find out how to save on energy spending by going solar. Remember, whatever you are spending unnecessarily on your infrastructure overheads affects your net profit, so it’s worth ensuring there is no wastage occurring.
Consumables and miscellaneous costs.
Do you have a member of staff who is responsible for looking after and ordering stationery and other supplies? Have they been ordering the same items from the same supplier for the last year or longer? It’s time to review what you’re buying and see if you can get a better deal elsewhere. It can be a good idea to give this task to your stationery person, as it will give them new motivation for performing the task and they will see it as something more than just a chore.
Make sure you have a plan for regular reviews and encourage your staff to feedback on any ideas they have that could save expenditure. You should also look at any other miscellaneous expenses, for example, if you subscribe to an industry publication, would you be better off and/or get more out of it if you moved to a digital subscription? Are all the things you’re paying for worth having – do they get used enough to warrant the cost? If a resource is not being used that doesn’t necessarily mean you should get rid of it. If it’s something that could be useful, but it’s not being exploited, find out why before deciding to ditch it.
Monitor your purchase costs.
You’re more likely to be monitoring the cost of purchasing stock if you are part of a supply chain, whereby you buy wholesale and sell retail. You should be aware that the price you buy at will affect your profit margin, and thus be keeping a close watch on price increases. Just monitoring increases and putting up your own prices to match is far too simplistic an approach, however. You should be assessing the savings you could make on bulk buying and using alternative suppliers, but remember to look at delivery charges, turnaround times, continuity of supply and quality issues. Saving forty dollars per box on your top selling line won’t be a lot of use if the new supplier is constantly running out or has unreliable delivery schedules.
Similarly, buying cheap will end up costing you sales if the quality of the product doesn’t match the previous standard. If your business is based on a service rather than a product, you might wonder how this applies to you. The answer is that your staff are effectively your purchase costs. They sell their services to clients and that creates revenue, and if your employees are costing too much in comparison to what they are generating in sales, the situation needs to be addressed.
Again, it’s not just a question of firing someone whose salary is costing more than they’re making for you. If they are normally very productive, find out if there’s a problem that can be fixed to get them back on track, and ensure they have the training and tools they need to perform well. You can’t expect a team of salespeople working for you to continue to bring in the big numbers if they don’t have the technology, facilities and knowledge to stay ahead of the opposition.
Staff costs.
Staffing is one of your most costly overheads so keeping control of such a big outlay is essential. What you mustn’t do is try to save money by paying your staff less than they’re worth, trying to operate with too few staff or not providing a decent level of training and staff benefits. These actions may look like they’re saving money in the short term, but will end up with you not being able to employ suitably qualified staff and the employees you do have will be demotivated, not be working at optimum productivity levels and may well not stick around very long. You then have the extra costs of replacing staff on a regular basis, plus lost time and the implications of having employees who aren’t doing their best for your business.
If you analyze your staffing and it’s clear there is not enough work for everyone, then it’s perfectly legitimate to make some cuts. If this is because you haven’t expanded at the rate you anticipated, or because of a seasonal slump in sales, it might be worth looking at operating on reduced hours rather than letting people go altogether. Then when things pick up, the hours can be extended again. This is a better option than losing trained staff and then finding you need more hands on deck after a couple of months.
Investing in good staff is a sound practice, because they have such an impact on your business’s operations and profitability. On the other hand, if a member of staff is clearly not pulling their weight and you’ve been unable to resolve the situation, terminating their employment is probably the best option. You can’t afford to have anyone working for you who is not doing their best.
Investment.
You need to be prepared to invest now to reap the rewards in the future, rather than being blinkered by the immediate cost implications. For example, with the motion activated lighting system, there will be an installation cost that might seem like a hefty investment, but when you calculate what you will save long term, you will see there is a logical justification for your decision to accept a capital cost. All your investments need to be assessed in light of how they will pay for themselves and in what probable timescale, so you can be sure that you are making decisions based on a realistic assessment of their viability.
Saving on unnecessary expenditure is an important part of maximizing profitability, but the key is to optimize, not just cut corners. Analyze the overall effects of any changes you make to ensure they will increase your profits without compromising your service.
