What would an extra 10-25% profitability mean for your business?
For many businesses, this could mean the difference between keeping the doors open, hiring a new employee, having breathing room or investing in a new opportunity.
Profit is elusive for too many businesses.
The biggest reason businesses fail is because they run out of money also known as profit.
What if there was a quick hack that you could implement today that would increase your profits today without costing you any money?
Sound too good to be true?
The quickest way to boost your profits is to perform an expense analysis overview.
If your serious about having more cash in the bank, then read below for my step by step guide to turn your business profits around today.
What Is The Expense Analysis?
The goal of the expense analysis is to differentiate between costs and investments in daily/regular spending. This is typically the first step when implementing Profit First, as most businesses can cut between 10%-25% of expenses without jeopardizing the quality of service or product. This allows the business to ensure they are using their current revenue to its highest potential.
Who Should Do The Expense Analysis?
Most business owners think they are running lean, and there is no waste. An expense analysis is beneficial even to these businesses, as it either confirms this to be true or sheds light in areas where this is not the case.
EVERY BUSINESS MUST RUN AN EXPENSE ANALYSIS QUARTERLY.
Why Do The Expense Analysis?
Each business must do its due diligence to ensure the health of the business. An expense analysis allows the business owner to understand where they are spending, and it drives them to ask better questions surrounding their daily investments to ensure they continuously generate a return.
How To Do The Expense Analysis?
Because an expense analysis is just as emotional as anything else in a business’ finances, we take a different approach to avoid an extreme case of loss aversion, which often leads to unwarranted justification. We accomplish this by reverse engineering into the expense goal for the quarter.
Benjamin Franklin said, “Drive thy business or it will drive thee.”
Step 1 Gather Financial Documents
For the expense analysis, you will need the following items:
- Profit & Loss Statement (P&L Statement) for the preceding 12 months that includes % of revenue for each expense. If your current month is September 2018, the P&L Statement should cover Sep 2017 – Aug 2018.
- Detail monthly general ledger for each of the last 12 months. Each monthly detail general ledger should only include that month’s items (i.e., January 2018 should only include items from January 2018).
Step 2 Conduct an Instant Assessment on Your Business
The Instant Assessment will let you know how much of your income is devoted to the following categories:
- Owner Pay
- Operating Expenses
Step 4 Determine Your Target Allocation Percentages
Based on the business’ Real Revenue, determine the Target Allocation Percentage for Operating Expenses. See the Chart below.
|Real Revenue Range||$0 – $250k||$250k – $500k||$500k – $1M||$1M – $5M||$5M – $10M||$10M – $50M|
Step 5 Identify Necessary Business Expenses
Once you have identified the Target Allocation Percentage (TAP) for your Operating Expenses, use the Income Statement to identify which expenses are ABSOLUTELY NECESSARY to maintain the standard of service or quality of the product up to this percentage point.
For many businesses, this includes, but is not limited to, payroll, software, internet/phone, etc.
Step 6 Eliminate Unnecessary Expenses
Once you have reached the TAP (let’s say 30%), “ring the towel.” Start to explore and CONFIRM your business is getting the most from each of these necessary expenses.
- Obtain a copy of the monthly detail general ledger for each of the last 12 months and review each of the Necessary Expenses. Each detail general ledger should only show the detail for one month (i.e., January 2018 should only items for January 1 – 31, 2018.)
- Review each month and look only at the necessary expense items you identified above.
- Mark any item you think is a candidate for reduction or elimination.
- Make a summary list of each of the items marked above and CONFIRM your business is getting the most from each of these necessary expenses
There are a few ways to do this:
- Call vendors and negotiate – “I have been a loyal customer, paying on time for years. WHAT CAN YOU DO FOR ME?” In many cases, this can result in a discount. If it does not, it often leads to an increase in value for the same investment you are making now
- Explore other options – Technology is constantly changing, and so are the accessible resources. There may be a resource available for ½ the cost with greater capability to meet your needs. Ask for references, and do your due diligence in research.
- Eliminate overlap – Many times, businesses have multiple resources with the same capabilities. Is there an option to consolidate?
- Create systems to track and verify expense success – For many expenses, there is no actual direct return on investment. For example, many employees do not generate revenue; instead, they retain revenue and support those who do generate the revenue. They are just as crucial to the success of the business as the revenue-generating employees.
Is there a definition of success for each employee or position and each daily investment? For expenses that cannot be cut, put tracking in place to verify the business is getting the most from the resource.
Repeat this process for EVERY single line item within the Necessary Expense under evaluation. You may end at 29.2%. That is a huge success! You were able to trim the fat on essentials in the business.
Ask yourself, “Can the business succeed with only the 30% of expenses under evaluation right now?” If the answer is yes, start cutting the expenses that are not imperative to the quality of work or efficiency level.
If the answer is no, move on to Step 7.
Step 7 Increase your Overhead Expenses TAP.
This adds an additional 10% to the 30% you have already evaluated. Identify which expenses are IMPERATIVE to the quality and efficiency of work.
Step 8 Repeat Step 6
Ring the towel for the additional 10%.
Repeat Steps 6, 7, and 8 until you reach the Quarterly Target Percentage.
Step 9 Cut outliers
Once necessary expenses have been confirmed, it is a lot easier to say goodbye unused subscriptions, software purchased for one client, and any other excess spending.