Cost-cutting
is often associated with down times. A slowdown in sales or increased
competition may force a business owner to reduce expenses just to maintain a
satisfactory profit margin. On the other hand, a savvy entrepreneur keeps a
constant watch on costs even when business couldn’t be better. Wise reductions
in specific fixed and variable expenses offer a number of benefits. They make
the business more efficient; provide opportunities to cut prices and attract
more volume; and make it easier to build reserves, whether to fund long-term
growth or survive short-term downturns.
One should
always be careful when cutting costs. When they affect legitimate expenses,
deeper-than-necessary cuts to the operating budget could come back to haunt
you. First, make sure you understand every segment of your business operations.
Compare your financial data with similar businesses and see how closely yours
is operating within industry norms. A break-even analysis will show the volume
point at which gross profit equals expenses. From that point on, a business
moves from a loss to a profit picture.
As you
review your business’s expenses, remember that even legitimate costs have a way
of creeping upward over time. It’s up to you to determine whether those funds
might be better used or less costly alternatives are available. You may be able
to negotiate a more favorable lease or renegotiate a long-term debt at a better
rate. In addition, seek out discounts that may be available if you meet pay
early.
One way to
reduce costs without cutting specific expenses is by increasing the average
sale per customer. This allows you to spread the same expense across a larger
income. The same approach works for retail operators who measure sales per
square foot.
Regardless
of volume, keep in mind your need to build in a solid profit margin on your
sales. If part of your product or service line has a small profit margin
because of competition and market pressure, you should add a higher profit
margin to other goods. Your objective is an average profit margin that meets
your business goals.
To learn
more about controlling costs and boosting profitability, contact SCORE® “Counselors to