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It’s an interesting phenomenon that, in an economic downturn, companies always find expenses that can be cut without impairing customer service or production.
If you ask yourself why, it’s obviously because the company has been paying for things that weren’t adding significant value.
When the economy is good and business is profitable, expenses can easily get away from you. You don’t feel the pressure to squeeze every penny of value from your process as you do when the economy is bad or business is down.
While this is understandable, it isn’t particularly wise. In this scenario, bad habits develop. People stop thinking about buying smart, and expenses can easily get out of control.
Don’t let odds and ends eat away at profits you could use more wisely.
To some, this may sound like a “Scrooge” mentality. But it isn’t. Spending money is a good thing if it adds value, either to your customers or your employees. Spending money on things that don’t add value takes money away from your employees and you as the owner. Don’t let odds and ends eat away at profits you could use more wisely.
Managing expenses isn’t fun, but it is necessary. An occasional hard look can help you uncover hidden wastelands.
Here are a few ways to investigate if your company has a money pit.
1. Pull your income statement from your least profitable year of the last five years.
Compare your expense items as a percentage of revenue to the same items on your current income statement.
Assuming the situation overall hasn’t changed significantly, if the percentage has increased, ask why. You may find that prices have increased and your buying patterns are still sound. But, you may also find that cost controls aren’t being watched as carefully as they should be.
Vendors may have inched prices up without being challenged by your purchasing department. Bills may not have been scrutinized for accuracy to the same extent as they are in harder times. Ask questions and get answers.
2. Look at your current expenses as a percent of revenue.
Start with the largest ones, and ask how often they have been shopped.
You’re not always looking for the cheapest provider (that can sometimes be a dreadful mistake), but you want to be sure you’re being prudent and keeping your vendors on their toes. It’s more about value than actual dollars and cents. If the service and product you’re receiving is worth the price you’re paying, don’t change. If it isn’t, take a hard look at other alternatives.
These larger expense categories have more room for “fat” and provide greater opportunity for savings. Checking these out can be time well spent.
3. Check expense reports.
It’s fairly easy for employees to bury unnecessary expenses in their expense reports. These expenses may be business related, but they may also be out of line for the need.
For example, are your employees spending more on wining and dining than is prudent? Are they buying special supplies that might not be approved through regular channels and running them through their expense reports to make them less obvious?
These aren’t criminal acts, of course, but they are counterproductive to your profits. You certainly want your team to be comfortable enough when they’re traveling and have the supplies they need. But don’t be blind to these tactics. When employees know that expense reports are carefully monitored, they will be less likely to try to sneak things through.
Using a well-developed budget can also help you avoid money pits. Budget expenses based on sales projections, and compare them to the actual expenditures on a monthly basis. Have the person responsible for that area explain any budget variances. That will help you reinforce your seriousness about cost control, and it will keep excess spending from getting far out of line before it is addressed.
You work hard to produce profits. Don’t let them be eaten away unnecessarily. Cover up those money pits.
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