Business Health Check #2 - Expenses
Regular business health checks are an easy way to spot problems before they happen.
Most business owners are extremely busy working on various parts of their operations, so without regular check-ups on financial health, they can easily lose control and become susceptible to financial problems. With that in mind, here’s a rundown of what you should be looking for during a business health check. Last week we looked at what we believe is the most important part of the health check process, revenue. Today we look at what we recommend is step 2 of every good business health check.... Expenses
Business Health Check #2: Expenses
Some increase in expenses is to be expected due to healthy growth, but some may have gotten out of hand if you weren't paying attention. Regular check ups of your expenses let you look for ways to save money.
DO YOU UNDERSTAND THE CONCEPT OF FIXED/VARIABLE COSTS?
If you don't understand the concept of fixed and variable costs that's okay it is a simple concept you won't forget.
Fixed costs are costs that are constant no matter what the level of output is. A perfect example of a fixed cost is rent. Whether a factory makes 10,000 items it's base rent is the same as if it makes 1 item. Same goes for services, if a barber has 5,000 clients a month his base rent is the same as if he has 500 clients. (Some leasing arrangements have a percentage rent component on top or in place of base rent, this is where rent is charged as a % of revenue. This sort of arrangement IS NOT a fixed cost)
Variable costs are costs that increase with increased output. The most common being Cost Of Goods Sold (COGS), but others can include Wages (not Salaries), some Utilities, Sales Commissions etc.
Once you know what all your variable costs are, you can break it down as a cost per unit/service to understand your margin/profit per unit/service you sell. That along with your fixed costs allows you to calculate your break-even point, the volume you need to sell to cover all of your fixed costs and variable costs and not lose money.
AREAS TO LOOK INTO FOR COST SAVINGS WITHOUT HURTING REVENUE
Review/cancel your SEO plans SEO (search engine optimisation) is often a bit of a dark arts where information given sounds like it is given in a complete foreign language. We all know the power of top spot on Google, and so do SEO companies and they can charge an arm and a leg for a shoddy service. If you currently are paying for SEO, ask for a report to see what site improvements they have made and what traffic those improvements have brought to your website. You'll be surprised at how simple some of these may be, and how you easily you can implement these for free yourself! Things as simple as Google & Facebook reviews are some of the simple ways you can improve your SEO. This could result in savings of $5,000 to $10,000 per year.
Review and re-negotiate your fixed costs Once a year you should block out some time and review what we call the "boring costs". These aren't the glamourous lead generating type costs but are there in the background eating away at your profits. Costs like equipment leases, internet and power are what I am talking about here. There's a good chance if you are not reviewing and re-negotiating these costs on a yearly basis your business is paying too much for one or more of these costs. This could result in savings of $2,000 to $3,000 per year
Consider Vehicle Leasing If you have car finance costs while the value of the asset depreciates, a switch to a lease can make sense. Some of the advantages of an operating lease are: - the cost is an operating expense making it 100% tax deductible (tax saving) - the leasing company is responsible (in most cases) for the car maintenance (cost saving) - the contract doesn't appear as a liability on your balance sheet - you don't need to borrow or invest capital to buy a vehicle, so you invest that money into something in the business that will make you more profitable (boost sales or produce cost efficiencies) - lease payments are much easier to budget for than one-off random costs that come with owning a vehicle If you're paying interest on any loan to purchase a vehicle plus all the unplanned repairs/maintenance that comes with owning the car, the cost saving here could be up to $5,000 every year
Audit your bank statement and find three costs that can disappear without anyone noticing For completeness sake it's best to do this audit on your actual bank statement rather than accounting records. Print off the bank statement for the last three months, remove all money coming in, and then highlight 3 costs that you either don't remember, don't understand or don't believe to be essential. You'll find that once you find three you will easily find more. What is important to remember here is that if these costs were to disappear tomorrow would your customers and employees even notice. If the answer is no, cut it immediately. What many consultants forget from the above piece of advice is your employees and team culture. Being a great place to work is worth more than what most of the savings in this section will be worth, so if you think there'll be a negative impact to a decent amount of your team don't cut it. The value of buying less milk for the tea room isn't worth the Chinese whispers it creates amongst the team or what gets said about your business around the BBQ this summer! Depending on the size of your business the savings here could vary from $1,000 to $7,000 but again weigh up each decision on a case by case basis, and if the cons of cutting back don't outweigh the saving CUT IT.
With 4 simple steps above your business could save anywhere between $10,000 to $25,000 a year. See below some more useful links about some of the above mentioned saving areas. And if you have any questions or feedback please get in touch.
Vehicle Leasing: https://www.moneyhub.co.nz/vehicle-leasing.html