Make More Profit by Eliminating Unnecessary Expenses in Your Small Business
The focus of any business is fundamentally to make a profit, and the more profit, the better. Here’s a super quick way to make more profit without making any additional sales.
Take a good look at every payment you’ve made over the past twelve months and put them through the following tests:
- Are you required by law to pay this bill? Examples of these expenses are staff superannuation, workers’ compensation insurance, annual ASIC fees (for companies), licence fees and memberships of professional organisations.
- Do you pay this bill because it is part of your cost of providing your services or selling your products? Examples of these are wages and sub-contractor costs for service based businesses and cost of products and delivery charges for product based businesses.
- Do you pay this bill as a requirement of doing business? For example, rent of premises, cleaning costs and electricity.
For all those payments that don’t fall into the above categories, you then need to put these through the next round of tests:
- Do you know or can you measure the return on the investment in this cost? What I mean by this, is can you identify new revenue which you have earned in the business which is as a direct result of spending this money? This test relates specifically to marketing and selling costs but also is relevant to other costs. If you are spending money on sales and marketing, and this includes website costs, social media costs, seminars, webinars, brochures, e-books and the list goes on, you must set up systems to track where your revenue is coming from so that you know which of the different costs are providing the revenue.
- Does this cost directly impact the productivity and efficiency of your team? This could include system costs which may include automation of processes or simply systems which make the work quicker for your team to perform. These costs may also include those related to team functions that are designed to build the culture of the business and encourage teamwork.
- Will your business cease to function in some way if you don’t pay this bill? This might include the costs of sending a regular newsletter where you don’t have any specific revenue you can identify from sending out the newsletter, but you know that your clients love to read it and would feel cheated if you stopped sending it.
Now the next step is to look at everything that you have left. If it didn’t pass any of the above tests, you need to ask yourself very seriously whether you need to keep paying this bill. There will be some bills that you will keep paying, but there will be others on this list that you can eliminate immediately or when the contract period expires.
In doing this review with countless businesses, there are always a number of costs that have been paid for some time for services that are no longer used or necessary. One client saved a few thousand dollars per month by doing this exercise, while others have saved a few hundred dollars. Even a few hundred dollars a month adds up to a few thousand dollars per year, which makes this exercise worthwhile.
There are two other steps to take to get the optimal benefit from this process.
Step 1: For every cost that passed the test and that you will continue to pay into the future, check whether you can either negotiate a better price from your supplier or look at alternative suppliers who may be willing to supply to you for a lesser price.
Step 2: For every new cost that you look at in the ensuing months, put it through the tests above. If it doesn’t pass the tests, then don’t spend the money. If it does, then go ahead.
Repeat this process annually. Over the twelve months, your business will have changed; your circumstances will have changed and costs that are necessary and pass the tests today, may not be necessary or pass the tests in twelve months’ time.
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