cost savings

An expense analysis is a tool to help monitor, control and manage expenses in your business. Learn more about it in this episode.

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Show Notes

You often read in the business news how companies are taking on cost control projects or have cost reduction projects as a strategy in their business.  These companies are focusing on improving operations and financial results.  In order for them to focus on these areas they use tools such as a cost or expense analysis.  In this episode, we talk about using an expense analysis to get insight into your costs and how to use it to take action and make improvements in your business.

Key Points

*Expense analysis is a best practice that companies use to review costs, understand the changes in those costs and the overall impact to the company.

*Benefits of the tool include helping business owners get clarity about costs, understand the impacts of the various types of costs and provide a basis to begin to benchmark results.

*An expense analysis creates a basis to develop cost control or reduction strategies as well as provide a sense of control for the entrepreneur about his company and cost structure.

*Growing companies are realizing increasing sales as a result of growth. However, expenses are growing too and can spiral out of control.

*Companies can find cost savings in direct and indirect ways and we explain what that means.

*Once you identify problem areas, you can then begin to research why things are not in line and how you can take action to correct them.

*Problem areas lead to decisions and actions that create opportunities to improve processes and systems that can take costs out through time savings leading to money savings.

*Your accountant plays a key role in analyzing expenses but cannot be the sole driver of this and Lisa explains why.

*Lisa provides examples from her own experience of ways companies have used expense analyses to save time and money.

Resources and Links

Need advice on how to get started with expense analysis and cost control in your own business?  Set up a Quick Care consultation with Lisa Roberts to help you get started controlling and monitoring costs in your business. Follow this link to learn more.

 

Note: Links in this post may be affiliate links.  Lisa Roberts is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

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Lisa Roberts is a business operations consultant who advises growth company entrepreneurs in successfully managing growth and the challenges they face along the way. She has over 25 years of experience in operations, finance and administration and spent several years in executive roles at a high growth company. She recognizes that there is a fine line between success and failure in a growing business and that entrepreneurs need to focus on managing finances, creating a sound operation and employ good business practices to stay on track.   You can find out more about her here

It’s the age -old question business owners ask – “how can I make more money?” Some ways are obvious and some not so obvious.  Some will say, “just sell more”.  Oh sure, you may have to sell more but at the end of it all, the real money owners make is really more about profit than about sales.

Check out some of the ways you might be able to make more money in your business.

100 bill, money

    1. Sell More Stuff – Obvious right.   Find more customers, find new markets, sell more to existing customers, sell supplementary products and services are all ways to sell more stuff. In addition, don’t forget about recurring revenue streams like maintenance, warranties, subscriptions and multi-year contracts.
    2. Sell More PROFITABLE Stuff – Not as obvious. # 1 could get you more money, but it could cause you to earn less if you’re not selling profitable stuff.   Selling more stuff is great if you only want to concentrate on the Top Line (sales), but selling profitable stuff will focus you on the Bottom Line (profit) and get you more money in the long-run.
    3. Know Your Costs – Obvious now from #2. Understanding your costs, especially your direct costs will help you recognize your most profitable sales. Higher gross margins on sales contribute to covering your other costs, like selling, general and administrative costs and help contribute more money (profit).
    4. Understand Cost Drivers – This one can be a little more difficult but necessary in order to avoid being caught flat-footed. Recognizing that a cost is rising, sooner rather than later, gives you the chance to do something about it before it costs you too much money. Understanding the impacts gives you a chance to combat it whether you need to raise prices, find substitutes, change offerings or find savings elsewhere in your business. Taking action earlier will help you save money.
    5. Minimize Hidden or Risk Costs – These costs are those things that could catch you by surprise.   Costs that rise because of something no one foresaw like a drought or natural disaster; expense of a lawsuit against your business; or uninsured losses – are all things that can catch you by surprise and cost you money.
    6. Avoid Wasted Time – This may not be as obvious to a business that “has always done it this way”. Most businesses can say, “Time is money”. The way you operate, the better your processes and procedures, can translate into saving time and therefore, money.
    7. Don’t Waste Money – Sure, it’s obvious not to just throw away cash in your business, but what about not so obvious waste. Employee turnover, lost customers, not maintaining equipment, and even bad internal communications can all cost you.
    8. Find More Efficiency – Efficiencies might be obvious and not so obvious. Shortening the delivery cycle, collecting money faster, automating functions, and improving processes can all be things that bring money in faster or save your business money.
    9. Budget and Monitor Spending – People don’t like to budget but if you’re running a business or even your personal finances it is still one of the best ways to manage your money effectively. It’s not enough to set a budget and forget it; to make more money you’ll have to monitor it and adjust it to maximize the money you make.
    10. Look For Savings – Obvious, right? It will not be, if you’re not monitoring your business results and your budget. Regular monitoring gives you a shot at controlling costs. The faster you deal with out of control costs, the more you save and the more you’ll make. Also, don’t forget about your recurring costs. Just as we mentioned earlier about recurring revenues, recurring expenses can cost you money. Look at recurring costs to see if they are still necessary, maybe you can reduce them. This will have a multiple savings effect because they are recurring.
    11. Ask For Savings – Your suppliers may be a great source to make more money. Agreeing to a price break, quantity discounts, longer payments terms, payment discounts and even taking on one of your own costs such as storage, delivery or just in time inventory management are all ways they can help your business save money.
    12. Outsourcing – Farming out part of your business operation can make a lot of sense in certain cases. There are obvious examples like payroll and benefits and not so obvious ones like shipping. Always remember that what you outsource should save you money and be something that can be done easily and accurately. However, remember, outsourcing something that is core to your operation, your brand or what makes you different, is something you should avoid.
    13. Recognize “Outsiders” Input – The pros, like accountants, lawyers, insurance specialists and other advisors, that your business relies on can be a source of good ideas for making more money. If they understand your business, they can recognize savings, advise on tax strategies to save, prevent lawsuits and provide valuable insights into better ways to do business more efficiently, effectively and with less risk.
    14. Manage Your Cash – one of the worst things a business can do is spend money just because it’s there. Let’s face it, cash is the lifeblood of most businesses. If you don’t manage it, maximize it and spend it wisely and strategically, you’ll have problems.
    15. Be Legal – Lawsuits, not following regulations, not paying your taxes, mistreating employees and so on are all ways that can cost your business money. So make sure that you understand and follow the laws and regulations that affect your business.
    16. Be Fair – Whether it’s your customers, employees or vendors, honesty, integrity and fair treatment will always win the race. Maintaining a reputation of being a good honest business that treats people fairly will make you more money in the long run.
    17. Hire Well – Taking time to hire the right people will help you avoid additional costs like lost productivity, low morale, recruiting and training. One survey noted that 41% of the companies said a bad hire cost them at least $25,000. http://www.fastcompany.com/3028628/work-smart/infographic-how-much-a-bad-hire-will-actually-cost-you#1.
    18. Serve Your Customers Well – Unless you’re the only game in town, your customers are the heart of your business. Serve them well and they will stick with you, make referrals for you and help you make more money.
    19. Save and Invest – Too many of us, individuals and businesses alike, spend what we make and don’t save or invest in the future. Business is uncertain. Having a nest egg for tough times and saving for future investments in your business is a sound strategy for its long-term health. Having an emergency fund will also lessen the impact of those unexpected surprises.
    20. Pay YourselfIf you are not making enough to pay yourself, ask yourself why. If you have been paying employees and not yourself for more than a few months, maybe you need to start doing more of the work yourself. If you started your own business, one reason was to make a living- that is you need to make a living.

 Remember, the top line – sales, only answers one part of the equation.  The real money you make will be more about the bottom line – profit. So, what ways could you explore in your business to not only bring in more money, but make sure the money you bring in is profitable and makes you money.

Sales are important in any business but a good cash flow is even more important and improving cash flow is one of the most powerful things that a business owner can do to create a more successful business. Exploring ways to increase cash flow will force a business owner to look not only at inflows, but also outflows of cash. The cost side can provide opportunities to improve your cash too.

For many businesses the top expense categories are cost of sales, inventory, wages, employee benefits, taxes, energy and rent. By finding savings in these high value categories, a company can see their bottom line grow and their cash flow improve.

Analyze Your Costs

In order to highlight opportunities for savings in the cost of sales, conduct a spend analysis and review your current supplier contracts. A spend analysis monitored over time will illuminate high dollar expenses and provide a starting point to attack some cost reductions.  Next, review your contracts with suppliers and negotiate cost reductions.

Your review could entail working with suppliers on programs to identify cost improvement initiatives.  These negotiations could also include having suppliers perform more services for you so that you lessen costs in your own business. In addition, process improvement initiatives and technological efficiencies have produced cost savings in many supplier companies that can be extended to your business in the form of price reductions.

Review and Monitor Inventory

The Periodic Review of inventory, period end counts, traditionally has been one of the main ways companies have identified excess costs such as obsolete or slow moving inventory.  While this method continues to be important, it is routine and other methods can be used to complement the periodic review. Many small and medium sized businesses can use inventory ratios to monitor and benchmark their inventory control practices.

The owner can identify areas where cost can be managed more effectively by monitoring inventory turnover. Slower turnover may reveal that there are slow-moving or obsolete items in inventory. It may further reveal that inventory order quantities are not correct and goods are sitting on the shelf too long. With this knowledge, the owner can act and create systems design to effectively manage things like economic order quantity, usage rates, lead times and obsolete items.

Review Larger Operational Costs

Wages and benefits are another large expenditure in many businesses as we have moved to a service oriented economy. For a business to compete for good quality personnel, the owner should have a firm understanding of the market for salaries in his industry and in the region where the business in located. Since certain job skills become hot while still others become a commodity, salaries in the market place change over time and business owner must adjust.

Understanding the market for the types of employees utilized in your business will help to ensure that you are not over or under paying for the skills that are required to run your business. In addition, a business should also define its own pay philosophy which describes how employees are paid and what types on benefits or incentives employees are offered. As pay for performance has come into vogue, businesses need to determine if that is right for their business and incent the desired performance of their employees in order to get the best return on the payroll expenditure.

Plan and Budget

Budget planning is a tool that businesses use to control and anticipate expenditures as well as select from the best alternatives for cost effective solutions.  Tax planning can perform the same function for tax expenditures in a business.  Surveys have shown that companies who actively plan and manage their decisions while taking into account the tax impacts have more effectively kept their tax costs lower than companies that did not.

Larger companies can hire people in-house that are specialists in this area but a small business must use his own outside tax accountant to perform this function.  Keep in mind, your outside accountant can help in the planning and execution stages. However, your accountant’s hands are tied after the transaction is complete, so involve them early in the planning and decision-making process.

Cost of Energy

Energy savings and going green are hot topics in the news and whether its skyrocketing gas prices, or new computer equipment that uses more power to operate, companies must consistently look for ways to save cash in this category.  Fortunately, there have been innovations in these areas that help businesses bring down these costs.  Business owners should review their energy expenditures and put in place programs to control and manage their energy use.  It may involve simple solutions for a small business like using programmable thermostats, turning off computers when not in use or using occupancy sensors in certain areas so that the lights are turned off when the room is not in use.

Larger companies may need to combine the efforts of their facility and IT teams to research better energy efficient options to run the company’s infrastructure.  Here businesses may consider solutions that include smart technologies that control the cooling of systems and servers, utilizing the internet for meetings to avoid travel costs or even installing solar panels to generate your own power. With the rising costs of energy and the additional power requirements of computer equipment, it is necessary for companies to continuously explore solutions to achieve savings.

Rent – A Large Recurring

A sometimes overlooked, but large, recurring cost for a business is rent.  Many businesses sign long term lease agreements and then forget about them until the agreement nears the end of its term.  Changes in real estate values and occupancy rates can alter the going rate for commercial rentals.  Periodically, a business owner can explore the alternatives and work with their landlord to obtain potential savings or additional rental perks for their business.

We have only touched the surface. This post was meant to get business owners to begin to think about some of the ways to explore savings in areas that carry large costs for a business.  By cutting costs in these high expenditure areas, a business owner has the opportunity to greatly enhance his cash flow and create savings to fund investment for the future.