As businesses struggle to make a profit on Guam and around the region during these tough economic times it may be wise to analyze all your expenses to see where you can possibly save a little to increase your bottom line. The reduction of specific fixed and variable expenses can improve your profit and help you survive. First a word of caution, do not needlessly cut costs as this can lead to your own self destruction! Legitimate expenses provide the framework for your business and you don’t want to cut your operating budget too deeply and kill your business. However, you must always keep on top of controlling expenses to maximize profits. Each year, expenses have a way of creeping skywards. It is up to you, to evaluate if those funds are being spent for their maximum effect.
First off, you can actually reduce costs without cutting specific expenses by increasing the average sale per customer. If you can increase the overall value of a sale to each customer, you then spread the same expense across a larger income. This gives you better sales vs. expense ratio. If you operate a retail store, you may measure sales per square foot. Your goal may be to increase the sales per square foot by certain percentage. Look to sales as a way to improve the success of your business. Beyond offering quality products and services, it is the sale of those goods and services that keep you in business.
Also keep in mind that you need to build in a solid profit margin on sales. A big sales volume with a thin profit margin is not the solution you are looking for. A part of your product or service line may have a smaller profit margin simply because of competition and market environment. If that is the case, then you must add a higher profit margin to other goods, so you can obtain an average profit margin, which meets your business goals.
Before you can accurately determine if cost cutting will increase profits, you will need to gather more information about your business operation. Proper record keeping is the start and a key to success! Your business records provide the financial data to prepare a budget, profit and loss statement, break-even calculations and operating ratios. This information can then be compared with similar types of businesses to evaluate if your business is operating within industry averages and help determine areas you need to analyze to cut costs and improve profits. A break-even analysis will show you the volume point at which your gross profit equals expenses. From that point on, you begin to move from a loss into a profit situation. The break-even point is a very important piece of information to you as a business owner to know.
Once you have all your records in order you can then start analyzing where you can cut some expenses. Your ultimate goal is to not pay more expenses then needed to maximize your profit. Evaluate expenses and look at areas that may be high or rising at a rapid rate. Look at how expenses are distributed from year to year and identify areas for review. Review each segment of your operating budget. Can you negotiate a better lease? Can you renegotiate a long-term debt at a better rate? Can you earn discounts by meeting accounts payable earlier in the payment cycle? Can you cut specific costs for specific time frames in order to reduce overall expenses? Can you get your receivables in quicker so you do not have to tap into your line of credit to cover costs? Ask yourself these and other questions.
To learn more about controlling costs, increasing sells, improving profit margins and managing profitably, contact the UOG Guam Small Business Development Center (SBDC) at 735-2590 and ask to schedule an appointment with a Guam SBDC Counselor or to find out what upcoming business trainings are scheduled.