Earlier this month, I had the opportunity to remind a business owner of the old maxim: "Success is not based on how much a business takes in, but on how much it does not spend."
In other words, the easiest way to increase profits is to lower expenses. That may mean lowering variable expenses (expenses that fluctuate based on your sales) or fixed expenses (expenses that don't vary from month to month).
There's no big secret to lowering costs. My first suggestion is to determine your major costs and research alternatives for pricing and quality. So now, here’s a question for the reader: Can you guess the top six small business expenses?
Answer: According to a National Federation of Businesses (NFIB) survey, the top six small business expenses include:
• Cost of goods (materials and supplies that are direct costs of goods),
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• Inventory acquisition and management
• Wages, salaries and commissions
• Employee benefits (excluding taxes such as FICA)
• Energy (electricity, gasoline, natural gas, etc.)
• Rent
Other lesser expenses include interest expenses, vehicles, business insurance, and business taxes. Many business owners are surprised to find out that the business expenses that appear to be the most modest for small business owners are marketing and advertising, and professional services.
When cutting expenses, start by doing your homework. If, for example, you're trying to get a better rate from your landlord, you can't do it without accurate marketplace knowledge about comparable rents. At the same time, keep in mind that the lower price quoted for that cell phone vendor, freight company, or importer, may also mean lower quality services (always a possibility). So, research should never be limited to price alone.
Another consideration could be to ask for price breaks. A penny-pinching mindset can sometimes be helpful but more important is a willingness to negotiate with everyone over everything. You may find it hard to ask for a price break but as my father always reminded me…You'll never know unless you ask. Once you get over that hurdle, you may find that the attitude of negotiating price reductions is addicting.
