Improving the Profit Formula Part 6- Cutting Overhead

Home » Blog » Improving the Profit Formula Part 6- Cutting Overhead

Every business owner understands that controlling costs is key to a profitable business. But few really understand the effect cost cutting will have on their bottom line. In this video I cover why cutting overhead is so important and how best to do so without affecting customer service.


Let’s assume that a business has variable costs (those costs that increase as sales increase) of 75 percent.  This means that for every dollar increase in sales, your net income only increases by 25 cents.

But this also means that a one dollar reduction in costs has the same effect on your bottom line as a four dollar increase in sales.

Most business owners concentrate on increasing sales and don’t really have a structured process for cutting costs.  A true understanding of the workings of the profit formula allows the business owner to understand the importance of both.

Here are some steps you should take to improve your operational systems:

  • Perform an annual cost cutting audit.
  • Control costs with zero-based budgeting.
  • Review your business to prevent losses and never blindly trust your bookkeeper.
  • Set up processes to collect your receivables. Remember, it’s not a sale until the money is in the bank.
  • Reduce inventory loss by determining the optimal inventory levels.
  • Have a process for identifying and selling slow-moving inventory.
  • Review all jobs for possible outsourcing.
  • Do a staffing review annually and don’t hire until absolutely necessary.
  • Know the exact cost of fulfilling every order. Put simply: Only sell what is profitable!
  • Take tax planning seriously. If your current tax preparer isn’t busy in November and December with tax planning, find one who is.