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have a profitable company there must be a "margin".
Revenues must exceed expenses. Assuming you have done
your work on the revenue side, you may be turning your
attention to reducing your expenses.
One approach to
reducing expenses is to list your overhead costs in
descending order of expense. The result is a prioritized
list of which costs to examine first to see if they
can be reduced.
Don’t dismiss
any item as “impossible to reduce” until
you’ve scrutinized it carefully and involved your
staff in looking for new options. It’s equally
important not to drop expenses that contribute significantly
to the long-term management of your operation.
When business
slows down you have the time – and the imperative
– to examine every part of your operation and
to streamline procedures. Use
charts showing the flow of all paperwork, orders and
product movement to reveal unnecessary steps and bottlenecks.
Identify the function of
each step, and decide if it’s a needed one.
Reducing overhead also improves cash flow
The lifeblood of any business
is its cash flow – that steady stream of dollars
and cents that comes from sales and then flows out in
the form of wages, inventory, rent, insurance and other
expenses. When the cash creek is running dry, look closely
at how to tap the financial resources dammed up in slowly
moving inventory and how to reduce the stream of regular
expenses that threaten to drain the bank account completely.
Facilities
Compare your rent with what you might pay if you moved,
and then ask your current landlord if your lease can
be renegotiated. If you are willing to sign a longer
lease, you may get a price break now or have the rent
forgiven or deferred in your slowest months. If you
decide you must move, look for a new landlord who will
pay off your current lease and cover your moving expenses.Also
consider shrinking the area you occupy and subleasing
some of the remaining space. If you own your building,
ask your banker about refinancing at a lower interest
rate or over a longer term.
Miscellaneous
costs
Keep only the dues and subscriptions that serve you
with valuable information or raise your profile in your
industry or community. An expensive golf membership
has to be evaluated in terms of whether your income
would drop without it. And while you’re on the
golf course, ask your friends about what they’re
doing to reduce overhead. Networking can find you a
better bookkeeper, a less expensive janitorial service
or a tip for trimming your inventory still further so
that your business is buoyantly afloat and doing well
when the economic tide turns.
Reduce
expenses through the Web
Have you considered the myriad of ways your company
can use the Internet to lower costs? From getting better
prices on supplies and equipment to reducing shipping
and travel costs, the Web can serve as your pipeline
to savings.
Targeting
overstocks
The question then is this: Where are you overstocked?
To find out, examine the average turnover for each stock
item. By comparing (a) how many of each item were sold
in an inventory year with (b) the item’s end-of-year
inventory, you can come up with a reliable conclusion.
Next, list the overstocked items that are selling well
enough to warrant holding the excess. Finally, list
the overstocked items that would be worth selling at
a discount to recover the cash. You might be carrying
items that turn over slowly because some of your better
customers occasionally order them, or because they return
exceptional profits. Instead, see if your vendor will
accept orders for single units with 24-hour delivery.
The additional handling charges will probably be less
than your current carrying costs.
You might benefit
by implementing “just in time” (JIT) inventory
control as a first step, since this approach has the
potential to greatly reduce carrying costs. But how
do you reduce inventory so that you’re running
lean and mean without jeopardizing future sales by being
under stocked?Start by calling us for the average inventory
turnover rate for your industry, and compare that figure
with your own rate. The formula is simple: divide the
cost of goods sold (for a month, quarter or year) by
the average value of your inventory during that period
to get your average turnover rate. Suppose you started
the year with $150,000 worth of inventory and ended
with $200,000 (average inventory: $175,000). If you
sold $525,000 worth of inventory in the same period,
the average inventory turnover would have been three
times a year ($525,000 ÷ $175,000 = 3).
Employee
savings
In this competitive world, your team's strength, opportunity,
reward and validation depend on profitability. Cost
management is not the sole province of people in the
finance department. Determine your ideal number of employees
by comparing your needs during your slackest times with
your average days. Analyze results, not efforts, to
gauge which employees should stay where they are, which
should be retrained, and which should be let go. Staff
for your minimum needs as long as that level will not
compromise service most of the time. It’s less
costly to pay overtime or bring in temporary help during
peak periods than to keep unnecessary employees on the
payroll. Involve your staff in a drive to in-crease
efficiency. When they come up with money-saving ideas,
show your appreciation. While bonuses are nice, what
counts most with many people is a public “thank
you.”
It takes a team
effort to analyze processes for creating ways to cut
costs without cutting value.
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