Cut Expenses to Increase Profits
By Joseph Lizio
Here's how managing spending and cutting costs can have a big impact on your bottom line.
Most business owners think that in order to improve their business or reach that next level, they have to raise revenue. And, while raising revenue is a great way to improve your business, it is not the only way.
Proper financial management is not just about revenue generation and raising capital but can also be positively impacted through managed spending and cost controls.
To be in business means to be in the business of making money. Thus, the goal is to realize the greatest return for the time and capital you invest in your business.
Now, it does take money to make money and that is why businesses should spend – especially on items that generate more business than they cost.
For example spending on items like marketing and development will generate more business than buying the new VP a Hummer. Keep in mind that good businesses spend money for very specific reasons and expect very specific results while bad businesses just spend.
The first thing that should come to any business owner’s mind is what return they would expect from their purchase (their spending). To grow your business, you spend money on production, marketing, equipment and other overheads but you must also understand how that spending will return the amount you spent (recover its cost) as well as provide additional revenue (profit) – profit that can be plowed back into the firm to once again generate more business thorough additional spending.
If you spend $2,000 on a marketing campaign but only see your revenues increase by $200 – you just wasted money – money that would have been better spent on other projects or in other investments.
Think about it this way – you don’t go out and buy a fax machine for your office and just let it sit there collecting dust. You want to make that asset work for you. Either by improving your revenue (i.e. getting orders faster or sending invoices faster so that you can be paid sooner) or save your time (time is money) by improving your operations or not having to drive down somewhere to fax documents. Money is also an asset that should be put to work and not just left to collect dust or wasted on projects that do not bring in more revenue than they cost.
Further, any spending should only be done if it enhances the core of your business (which is how the business makes money) – anything else is just waste.
Lastly, spending on purchases that create greater returns is not the only option in improving business. Let’s say that your business is essentially stuck at a price point of $100 per unit. This price is set within your industry and any increase on your part will only drive away your customers. Currently, your net income margin or the amount you profit from each item sold is $5. But, by focusing on ways to improve costs (reduced material charges, reduced overheads like salary or rent or just finding improvements in marketing and other administrative spending) can also increase your business’s cash flow and ultimately profits. If your overhead costs are say 95% of your gross margin and you find say another 5% cost improvements, your $5 profit per item can significantly increase or nearly double to $9.75. Not bad given that all you had to do was control spending while servicing the same number of customers with the same product.
Bottom line – spending just for the sake of spending is not good business practices. Plus, most of the items your business will spend money on do not live up to their promises. When considering your business’s spending habits, keep in mind that if your proposed outlay of capital will not generate at least enough to pay for itself, it is not worth it. And secondly, better cost management can be a better way to increase profits – especially in an economy where overall consumer spending is down.
About the Author:
Joseph Lizio holds an MBA in Finance and Entrepreneurship and has a strong commercial lending background. In his current venture, Mr. Lizio is the founder of www.businessmoneytoday.com, a site designed to help business owners find and obtain capital to grow their businesses.