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How to Cut Costs and Expenses in a Business
Effective Cost Reduction Strategies in a Small Business
By BizMove Management Training Institute
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Copyright © by BizMove
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Table of Contents
1
...
Paying The Right Price
3
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Break-Even Analysis
5
...
Taking Action
Bonus Guide
7
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Introduction
Increasing profits through cost reduction must be based on the concept of an organized,
planned program
...
Cost reduction is not simply attempting to slash any and all expenses unmethodically
...
Cost reduction does not mean only the reduction of specific expenses
...
Some of the ways you
do this are by increasing the average sale per customer, by effectively using display
space and thereby increasing sales volume per square foot, by getting a larger return
for your advertising and sales promotion dollar, and by improving your internal methods
and procedures
...
A
big sales volume does not necessarily mean a big profit, as one retailer, Carl Jones,
learned
...
Each year,
sales volume increased
...
But Mr
...
When he discussed the problem with his banker,
Jones was advised to check expenses
...
"
Go to Top
2
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Determining that price for your
operation goes beyond knowing what your expenses are
...
Look, for example, at the payroll expense
...
If you train a salesclerk to make multiple sales at higher unit prices, you increase
productivity and your profits without adding dollars to your payroll expenses
...
An understanding of the worth of each expense item comes from experience and an
analysis of records
...
Their analysis provide
facts which can help you set realistic goals, you are paying the right price for your
store's prosperity
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Analyzing Your Expenses
Sometimes you cannot cut an increase item
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In analyzing your expenses, you should use percentages rather
than actual dollar amounts
...
When you decrease your
cost percentage, you increase your percentage of profit
...
Your goal, of course, is to
do both: to decrease specific expenses and increase their productive worth at the same
time
...
This information can be obtained only if you have an
adequate recordkeeping system
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Go to Top
4
...
Break-even
is the point at which gross profit equals expenses
...
The two condensed profit and loss statements, in the accompanying
example, illustrate the point
...
In statement "B" for the same store, the sales volume is
beyond the break-even point and a profit is shown
...
As shown in the example, once your sales volume reached the break-even point, your
fixed expenses are covered
...
It is important to remember that once sales pass the break-even point, the fixed
expenses percentage goes down as the sales volume goes up
...
In the
illustration, fixed expenses in Statement "B" decreased by 5 percent and operating profit
increased by 5 percent
...
Locating Reducible Expenses
Your profit and loss (or income) statement provides a summary of expense information
and is the focal point in locating expenses that can be cut
...
As a report of what has already been spent, a P and L
statement alerts you to expense items that bear watching in the present business
period
...
At the end of each quarter might be often enough for
some firms
...
Regardless of the frequency, for the most information two P and L statements should be
prepared
...
The other should report
on the same items for the last complete month or quarter
...
(2) last year's figures and the percentages
...
(4) budgeted figures and the respective percentages
...
(6) average percentages for your line of business (industry operating ratio) when
available, and
(7) the difference between your annual percentages and the industry ratios - under or
over
...
The
important basis for comparison is the percentage figure
...
When you have indicated the percentage variations,
you should then study the dollar amounts to determine what line of operative action is
needed
...
Variable expenses are those
which fluctuate with the increase or decrease of sales volume
...
Fixed expenses are those which stay the same regardless of sales volume
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Go to Top
6
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A key to the effectiveness of your cost-cutting
action is the worth of the various expenditures
...
Keep an open
eye and an open mind
...
Take action as soon as possible
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Go to Top
Bonus Guide
7
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One immediate and obvious difference is that a
majority of smaller firms do not normally have the opportunity to publicly sell issues of
stocks or bonds in order to raise funds
...
One, therefore faces a much more severely restricted set of financing
alternatives than those faced by the financial vice president or treasurer of a large
corporation
...
For example, the analysis required for a long-term
investment decision such as the purchase of heavy machinery or the evaluation of
lease-buy alternatives, is essentially the same regardless of the size of the firm
...
One area of particular concern for the smaller business owner lies in the effective
management of working capital
...
Lack of control in this crucial area is a primary cause of
business failure in both small and large firms
...
One convenient and effective method to highlight the key
managerial requirements in this area is to view working capital in terms of its major
components:
(1) Cash and Equivalents
This most liquid form of current assets, cash and cash equivalents (usually marketable
securities or short-term certificate of deposit) requires constant supervision
...
Key issues in this
area include: Is the amount of accounts receivable reasonable in relation to sales? On
the average, how rapidly are accounts receivable being collected? Which customers are
"slow payers?" What action should be taken to speed collections where needed?
(3) Inventories
Inventories often make up 50 percent or more of a firm's current assets and therefore,
are deserving of close scrutiny
...
Key
issues to investigate in this category include: Is the amount of money owed to suppliers
reasonable in relation to purchases? Is the firm's payment policy such that it will
enhance or detract from the firm's credit rating? If available, are discounts being taken?
What are the timing relationships between payments on accounts payable and
collection on accounts receivable?
(5) Notes Payable
Notes payable to banks or other lenders are a second major source of financing for the
business
...
Accrued expenses represent such items as salaries
payable, interest payable on bank notes, insurance premiums payable, and similar
items
...
Careful planning is required to
insure that these obligations are met on time
...
The guides which follow provide
suggestions, techniques, and guidelines for successful management which, when
tempered with the experience of the individual owner-manager and the unique
requirements of the particular industry, may be expected to enhance one's ability to
manage effectively the financial resources of a business enterprise