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Improving Profitability through Expense Reduction
Almost every business organization has expenses that could be reduced. And reducing expenses adds dollars directly to net profit.
Let us pose a simple business equation. SALES - EXPENSES = PROFITS. Mathematically, it can not be disputed that expenses have a direct effect on profits. So it stands to reason that if you can increase sales revenues and reduce expenses the overall effect on profits is greater. Dramatically.
Managers get pumped-up about customers and they love to manage the side of the business that affects sales. Expenses, on the other hand, can become the neglected child. Yes, managers do review expenses at some stage but generally don’t do it frequently and usually it’s done without enthusiasm. No cost category in business should be sacred. It is too easy to get into routine spending habits. The question why should always be asked.
- Why do I need to incur this cost?
- Why am I paying this much for this product/service?
- Why do I buy from this supplier?
But before you go shaking up your organization on a cost cutting rampage, you need to know that most organizations including your own have low-hanging fruit when it comes to reducing expenses. There are those expense categories that are ripe and just sitting there waiting to be picked. Start with these and profits can be added immediately.
Separate your organizations expense categories into Core and Non-Core expenses. Non-Core expenses are where you should start looking. You can categorize Non-Core expenses as overheads, the costs of doing business or those costs that don’t directly bring in business or sales. You may find that these Non-Core expense categories only make up 20% of your overall expenditures, but paying attention to them now will cause growing savings that will effectively increase future profits.
Once you have been convinced of the dramatic savings you can achieve from these relatively small expense categories you will soon create your own cost management culture. With the experiences and confidence gained you can now turn your focus to larger categories in search of hidden profits.
Bob Fifer, author of Double Your Profits in 6 Month or Less believes when setting reduction goals, Budget 15% savings for purchased products, and 30% for purchased services. Certainly aggressive, but very attainable if you have not reviewed these categories in the past and have been accepting incremental price increases over time. You may not see these savings figures in all categories, some will be more, some less. You will still have made a lot of money. Is it all too daunting a task? Where will you find the internal resources to take on these projects? If there is not available capacity or expertise within your organization often the most effective way of reducing expenses is by outsourcing this task. You can focus your own resources on your core business and even after you account for professional fees you will be much further ahead, immediately and in future profitability.
Greg Lathem is an expense reduction consultant with Expense Reduction Analysts International. Greg is a regular contributor to businessmatch-maker.com.
I need to reduce expenses.
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