Expense Management Strategies
There are three main routes to profitability — increasing sales, increasing gross profits, and reducing operating expenses. For the most part, shop owners diligently travel the first two routes, but for most shop owners, employing expense management strategies is the road less traveled.
There are many ways to tackle the task of expense management. Basically, expense management entails a conscientious review of policies and procedures in three basic categories — purchasing, current routine expenses, and operational efficiencies. Expense management has to do with more than just cost-cutting — it’s a process and approach to doing business successfully. Expense management is a critical component to being able to become, and remain, competitive.
There may come a time when a shop owner is faced with the need to immediately cut expenses. It could be triggered by a slump in the economy, the impact of a new local competitor, or simply the desire to regain profitability or to fend off losses that may lead to business failure.
Whatever the reason, every little bit of expense-cutting adds up. Keep in mind that many business expenses can be negotiated for better rates or terms. With a little planning and some research, shop owners may be able to find better products and services for less.
To begin developing an expense management strategy, we recommend that you gather information by listing, perhaps in a spreadsheet format, all regular recurring monthly expenses that include both products and services. Next, list any anticipated capital expenditures and other non-recurring expenses that your business anticipates coming due during the course of the year — for example, a new piece of equipment, leasehold improvements, etc.
Purchasing Policy
Your shop’s purchasing policy should begin with the development of a budget for all planned purchases, as well as some allowance for emergency purchases. Start with purchases that you must make regularly to conduct business, followed by purchases of items that you’d like to have, but do not necessarily need.
Other considerations should include purchasing consumables in bulk quantities if they offer price incentives that warrant inventorying those items; whether or not to purchase items new or used, or even to rent rather than own; and finally, of course, comparison-shopping for the suppliers that offer the best price and service.
Monthly and Recurring Expenses
The process of thoroughly reviewing monthly and recurring expenses is quite challenging because it requires due diligence, a significant amount of time, and detailed documentation. We recommend that you approach this task with the idea of doing it in bite-sized increments. Following are some common and not-so-common expenses, along with ways to both control and reduce them.
Telephones:
Today’s market offers a significant number of options when it comes to phones. You may have available the option of using hard-wired phone systems or Internet Protocol (IP) phones that operate via an internet connection. In many instances, the IP option will lower your overall costs significantly.
We encourage you to review the number of phone lines you’re currently paying for, services such as voice mail and caller ID, as well as other options, to see if you’re obtaining a good return on your investment. You may be able to get along just fine with fewer lines.
Your business may also utilize cell phones instead of or in addition to your regular phone lines. Make sure to review your service agreements to see if you can switch to better plans and/or other carriers.
Internet and Website Hosting:
Quite often the fees related to internet use and website hosting get overlooked, and these charges can add up over the course of the year. Make sure to review these expenses to ensure that you are partnered with the most cost-effective providers.
Real Estate & Rental Space:
We’ve found that the majority of the industry leases far too much space for the production they achieve. Review your use of the space; if you have too much space to grow into in a reasonable time period, you may want to try to negotiate a rent concession from your landlord, or sublet out some of the space. If your lease contains a sublet restriction, ask for a waiver. Consider moving to a facility with lesser square footage when your lease is up. If you have some items that require storage, it may be less costly to rent a trailer for them instead of using expensive building space. Perhaps even renting off-site storage may prove to be less costly.
If you’re leasing space in a multi-tenant facility, exercise your rights under your lease to audit the Common Area Maintenance (CAM) fees. Engage an independent Certified Public Accountant experienced in such audits, and ask the landlord to reimburse you for any discrepancies.
If you own or are about to purchase your facility, challenge your real estate property tax assessment. A recent study shows that 75% of the businesses polled challenged their assessment, and almost nine out of ten won!
When it comes to interest rates and terms, banks and mortgage companies do negotiate. If you can beat your current interest rate by 2% or more, it may make sense to refinance. After all, a .25% per year difference in interest rates on a $200k loan is $500 per year. To improve cash flow, you may want to extend the term.
We’re going to stop here today, and discuss the many other cost-saving areas in our next post. Make sure to check back in two weeks for more! In the meantime, if you have any other questions on cost-saving measures, call our office at 800-755-0988.
