Increasing profitable sales can be accomplished by all business owners, but doing so takes time. The fastest way to increase profits is to decrease overhead costs. If you have a 50% cost of goods sold rate, then every $1 reduction in expenses is equal to a $2 increase in sales.
The good news is that in every business I have reviewed I have been able to help them identify 10% to 20% in overhead cost reductions. In fact, when I am helping business owners who are close to shutting down, we can easily find ways to cut expenses by 50% or more. So the question is, why wait until you are forced to dramatically cut costs?
The first step in cutting costs is to get the following information:
- List all your expenses, other than payroll, over the last 12 months.
- Highlight any recurring expenses such as rent, subscriptions, internet access, training classes, magazines, etc.
Now multiply your overhead costs by 10%. This is the goal you are going to set for yourself as an amount you are aiming to cut.
Review each expense item and ask yourself:
- Can you cancel the expense item without reducing your profits and affecting your customer experience? If not, try to negotiate every other expense down.
- Ask yourself, “Does this expense item contribute to profits by increasing efficiency or by helping me improve the customer experience in order to increase profits?” If your answer is no, then plan to eliminate it as soon as you can.
If you still haven’t reduced your expenses by 10%, start asking yourself tougher questions. One of my favorites is, “How can I get two times the result with half the effort and cost?” This is a fantastic question for making massive changes and increasing your profits.
Once you have reduced your expenses by 10%, continue to review your expenses every quarter to catch any expense creep that every business experiences if you are not careful.
Your goal is to become a very frugal business owner—not simply a cheap one. Remember, if an expense doesn’t lead to increased profits, eliminate it as soon as possible.