In a previous blog I focused on the importance of Revenue Generation and while implementing strategies and tactics to improve revenue will accelerate your journey towards success, expense management is what ensures that your efforts provide the profit you’re looking for. Increasing your revenue and spending it all on the effort to obtain it, is a losing proposition (pun intended). You have to keep in mind that profit is what you’re really after.
Oftentimes, businesses only apply a serious focus on expense management when there is a need to retain, or regain, profitability. However, continuous expense management can lessen the need for this crisis management approach and reduce the magnitude of impact when challenges arise.
When expenses are consistently managed through a continuous improvement approach, these major expense reductions don’t need to have such a negative impact. Consider this, if expenses are managed similar to sales, with monthly reporting, monitoring and positive recognition across the company more savings can be generated while reducing the “things taken away” effect that occurs during major cost reductions. In order to implement a continuous improvement expense management plan, you need to implement the following 5 keys for effective Expense Management.
- Establish a formal Expense Management Policy with a focus on consistent and continuous expense management.
- Assign Responsibility and Accountability of specific expenses to appropriate individuals.
- Establish and Centralize Oversight of the expense management function. Include regular management reporting and audit capabilities.
- Develop expense management systems and processes.
- Implement & Utilize tools for efficient expense management.
- Automate & integrate systems and processes.
- Utilize corporate credit cards and electronic payments.
Using this approach will establish expense management as a systemic part of your business.
When managing expenses, what you’re really doing is protecting the organizational profit. There are two categories of business profit, Gross Profit and Net Profit. Gross Profit is the result of Revenue less Cost of Goods Sold. These costs are the direct costs of producing the goods sold by a company. This includes the cost of the materials and labor directly used to create your products but may exclude certain indirect expenses, such as distribution costs and sales force costs. Most indirect expenses are categorized as Operating Costs. Net Profit is the result of Gross Profit less Operating Costs.
So, let’s focus on the two major expense categories. If you can reduce the overall Cost of Goods Sold by 10% and do likewise with your Operating Expenses, you’ll have effectively improved both Gross and Net Profit. Do the math. Assume you have Revenue of $100,000; COGS of $30,000; Operating Expenses of $ 50,000; and Net Profit of $20,000. Now reduce each, COGS and Operating Expenses by 10% and update the calculation. When you do, you’ll find a 40% increase in Net Profit. ($20,000 vs $28,000) Do you think you could find a 10% reduction in each of these areas? No, then try a smaller cost reduction percentage. Apply this approach to your company performance and you’ll be amazed at the Net Profit improvement these efforts will achieve.
Here are some ideas on how to reduce these expense categories. I’m sure you can come up with others, but these should get you started.
Cost of Goods Sold
- Utilize Preferred Vendors & Suppliers
- Negotiate lower pricing on purchases
- Obtain competitive bids for purchases
- Reduce direct labor cost through technology use
- Obtain Volume or Frequency pricing on Inventory or Shipping
- Reduce Storage and Warehousing cost
- Reduce excess inventory
- Receive more frequent shipment
- Negotiate rental terms
- Use lower cost staffing options
- Re-negotiate all service contracts
- IT & Communication
- Utilize “Work from Home” to reduce rental space and cost
- Implement Technology for lower cost operations
- Reduce Banking and Credit Costs
Now, pull your team together and start brainstorming ideas to get that 10% reduction in each category. Make sure that those responsible for, or that have a significant impact on major expense line items are in the discussion. Leverage the information in my previous Revenue Generation blog with these expense reduction strategies and begin accelerating your company profitability, today.