How to Cut Costs and Reduce Expenses in a Business

Increasing profits through cost reduction must be based on the concept of an organized, planned program. Unless adequate records are maintained through a proper accounting system, there can be no basis for ascertaining and analyzing costs.

Cost reduction is not simply attempting to slash any and all expenses unmethodically. The owner-manager must understand the nature of expenses and how expenses inter-relate with sales, inventories, cost of goods sold, gross profits, and net profits.

Cost reduction does not mean only the reduction of specific expenses. You can achieve greater profits through more efficient use of the expense dollar. 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.

Profit is in danger when good merchandising and cost control do not go hand in hand. A big sales volume does not necessarily mean a big profit, as one retailer, Carl Jones, learned.

Jones's pride was stocking stylish and well assorted lines of merchandise. Each year, sales volume increased. This increase was attributed to good merchandise which Jones felt took care of the steady rise in expenses.

But Mr. Jones began to have doubts when he found it necessary to get bank loans more often than had been his practice. When he discussed the problem with his banker, Jones was advised to check expenses. As the banker said, "A large and increasing sales volume often creates the appearance of prosperity while behind-the-scene expenses are eating up the profit."

Paying The Right Price

Your goal should be to pay the right price for prosperity. Determining that price for your operation goes beyond knowing what your expenses are. Reducing expenses to increase profit requires you to obtain the most efficient use of the expense dollar.

Look, for example, at the payroll expense. Salesclerks are paid to sell goods, and their productivity is the key to reducing the payroll cost.

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. Or, if four salesclerks can be trained to sell the amount previously sold by seven, the payroll can be cut by three persons.

An understanding of the worth of each expense item comes from experience and an analysis of records. Adequate records tell what has happened. Their analysis provide facts which can help you set realistic goals, you are paying the right price for your store's prosperity.

Analyzing Your Expenses

Sometimes you cannot cut an increase item. But you can get more from it and thus increase your profits. In analyzing your expenses, you should use percentages rather than actual dollar amounts.

For example, if you increase sales and keep the dollar amount of an expense the same, you have decreased that expense as a percentage of sales. When you decrease your cost percentage, you increase your percentage of profit.

On the other hand, if your sales volume remains the same, you can increase the percentage of profit by reducing a specific item of expense. Your goal, of course, is to do both: to decrease specific expenses and increase their productive worth at the same time.

Before you can determine whether cutting expenses will increase profits, you need information about your operation. This information can be obtained only if you have an adequate recordkeeping system. Such records will provide the figures to prepare a profit and loss statement (preferably monthly for most retail businesses), a budget, break-even calculations, and evaluations of your operating ratios compared with those of similar types of business.

Break-Even Analysis

A useful method for making expense comparisons is break-even analysis. Break-even is the point at which gross profit equals expenses. In a business year, it is the time at which your sales volume has become sufficient to enable your over-all operation to start showing a profit. The two condensed profit and loss statements, in the accompanying example, illustrate the point. In statement "A", the sales volume is at the break-even point and no profit is made. In statement "B" for the same store, the sales volume is beyond the break-even point and a profit is shown. In two statements, the percentage factors are the same except for fixed expenses, total expenses, and operating profit.

As shown in the example, once your sales volume reached the break-even point, your fixed expenses are covered. Beyond the break-even point, every dollar of sales should earn you an equivalent additional profit percentage.

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. Also the operating profit percentage increases at the same rate as the percentage rate for fixed expenses decreases - provided, of course, that variable expenses are kept in line. In the illustration, fixed expenses in Statement "B" decreased by 5 percent and operating profit increased by 5 percent.

Compare your financial plan periodically with actual operations statistics. With effective records you can do this. Afterward,
where discrepancies show up it is possible to take corrective actions before it's too late. The proper decisions for the right
corrective action will depend upon your own knowledge of management methods in buying, pricing, selling, selecting and training
personnel, and tackling other management issues.

You're thinking you are able to hire a bookkeeper or an Accountant to deal with the record keeping for you. Yes, you can. But
remember two very important facts:

1. Supply the accountant with accurate input. Should You Purchase something And also do not record the sum in your business
checkbook, the accountant can not enter it. Should you sell something for cash and do not record it, then the accountant will not
understand about it. The records the accountant prepares will be no greater than the information that you provide.

2. Utilize the documents to make conclusions. If you went to a doctor And he told you you were ill and needed certain medicine to
get well, you'd follow his guidance. Should you pay an accountant and he tells you your sales are down this season, do not hide
your head in the sand and pretend that the issue will go away. It won't.

Business Management Roll in Personnel Selection. If your business Will be big enough to require outside help, a significant
responsibility will be the choice and coaching of one or more employees. You may start out with family members or business
partners that will help you. But when the company develops - as you hope it will - the time will come when you must select and
train employees.

Careful selection of personnel is essential. To select the right Employees determine beforehand what you want each one to perform.

Then search for applicants to fulfill these particular needs. In a small Business you may need flexible employees who can shift
from task to task as required. Include this in the outline of all those jobs you wish to fill. At the exact same time, look ahead
and plan your hiring to guarantee an organization of people capable of accomplishing every crucial function. In a retail store, a
salesperson may also do stock-keeping or bookkeeping at the outset, but as the company grows you'll need sales people,
stock-keepers and bookkeepers.

Once the job descriptions are composed, line up applicants whom To make a selection. Do not be swayed by clients who may suggest
relatives. If the applicant does not succeed, you might drop a client as well as a worker. Some sources of possible new employees
are:

1. Recommendations by friends, business acquaintances. 2. Employment agencies. 3. Placement agencies of top schools, business
schools, and colleges. 4. Trade and industrial institutions. 5. Help-wanted ads in local papers.

Your next job is to screen want ad answers or application Forms delivered by employment agencies. Some applicants will be removed
sight unseen. For each of those others, the application form or letter will serve as a basis for the interview which should be
conducted in private. Put the applicant at ease by describing your business generally and the occupation in particular. As soon as
you have done this, encourage the applicant to talk. Picking the proper individual is extremely important. Consult your questions
carefully to find out everything about the applicant that's pertinent to this job.

References are crucial, and should be checked before making a final decision. Check through a personal visit or a phone call
directly to the applicant's immediate former supervisor, whenever at all possible. Confirm that the information given you is
accurate. Consider, with conclusion, any negative remarks you hear and what is not said.

Checking references may bring to light significant Details Which may save you money and future inconvenience.

Personnel Training. A well-selected worker is only a potential Asset to your organization. Whether he or she becomes a real asset
depends upon your own training. Remember:

To allow sufficient time for instruction. Not to expect too much from The trainee in too brief a time. To let the employee learn
by performing under real working conditions, with close oversight. To follow along with your training.

Check the worker's performance after he or she was in work For a time. Re-explain key points and short cuts; bring the employee up
to date on new developments and invite questions. Training is a continuous process which becomes constructive oversight.

Personnel Supervision. Supervision is the third essential of employees control. Good supervision will lessen the cost of operating
your company by cutting down on the number of employee mistakes. If mistakes are corrected early, workers will get more
satisfaction from their jobs and perform much better.

Motivating Employees. Small businesses sometimes face particular Issues in motivating employees. In a large business, a Fantastic
employee can see An opportunity to progress into management. In a small business, you are the management. One thing you may wish
to Think about is to provide good workers a Small share of the profits, either via part-ownership or even a profit-sharing plan.
Someone who has a"share of the activity" will be more Concerned about helping to make a success of the business.

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