You can improve your bottom line by cutting certain expenses, but sometimes you need to spend more.
Cutting expenses might seem like a sign of trouble, but it doesn’t have to be. Even the most profitable business can benefit from a long, hard look at how it spends and where it can rein in expenses.
That’s only one side of the equation, though. The other side is determining where you might profitably spend more – and the right decision there can be just as important to your long-term success.
Of course, each of those choices sooner or later brings on what I call the Goldilocks moment: You don’t want to spend too much, and you don’t want to spend too little – you’ve got to figure out what is just right.
As business consultant, coach and speaker, Ron Hequet of Weatherford, Texas, points out, decisions about cutting and spending are deeply intertwined. Hequet was one of a number of business experts who recently offered me their insights on the twin questions of what to cut and where to spend more.
Ideally, says Hequet, a cost-cutting plan should be part of a much bigger picture: A plan to boost your business to increase profits – or as he puts it, “a plan to sell your way out of a decrease in profitability.”
Even if cutbacks are urgent, you should still proceed with care. “There are key functions or processes in any business that if eliminated would place the company in jeopardy of losing market share or core customers,” says Hequet, whose website is http://profitandcashstrategist.com. “Don’t use an axe; use a surgical knife.”
Where to cut
Anemic promotion: Look closely at your ad spending, suggests Ken Boyd, author of Cost Accounting for Dummies and a St. Louis-based small-business finance consultant. Where do you get the bulk of your referrals – the Yellow Pages? An online listing? Industry publications? Focus on the ones that deliver and cut back on – or cut out entirely – those with less oomph for your operations.
“Small businesses either attempt too many ways to produce sales simultaneously or go with the ‘hot’ sales method of the month,” says Hequet. Business owners need to research what ways work best.
And if you don’t know where your customers come from, ask them! Ask all first-time callers “How did you hear about us?” and collect the answers.
Dave Bakke of the website Money Crashers (www.moneycrashers.com) points out that social media – Facebook, Twitter and the like – can offer free or inexpensive opportunities to market your services that may be as effective as more expensive traditional advertising channels.
In a related issue, do you belong – and pay dues – to a host of business organizations in which you have little or no involvement? Drop out, says CPA Thomas Scanlon of Borgida & Co. in Manchester, Conn.
And Hequet points to another likely expendable form of promotion: “institutional marketing” that’s solely aimed at “keeping your name out there” for community support. “When a customer wants to make a purchase, the fact that you placed an ad in the high school or Little League program won’t be one of the reasons they choose to do business with you,” he says. There’s nothing wrong, and plenty right, with supporting your community – but don’t consider that part of your marketing and promotional efforts.
Office supplies: If you’re not already signed up for your office supply retailer’s rewards program, you’re probably missing out. Bakke notes that the discounts you get for accumulated purchases can add up to important savings.
Vehicle insurance: Check if your company vehicles are over-insured, says John O’Donnell, chief knowledge officer for Online Trading Academy. Can you afford a higher deductible or a lower replacement value? Are you paying twice for the same coverage – like towing insurance both through your insurer and through a motorist’s club?
At the same time, don’t overreact. As CPA Scanlon points out, having too little insurance is a huge risk you don’t want to take on.
Cellphone insurance: This kind of insurance, though, is probably expendable for almost all of us. It seems like such a small amount – $5 to $11 a month tacked on your cellphone bill – but over a two year period that can add up to $100 or more per phone. Not only that, but for higher-end smartphones, you can still have a deductible of as much as $200 – and you’re limited to as few as two claims a year. Instead, see if you can include your cellphones in your general business policy. Or set aside money to replace or repair equipment when it gets lost, stolen or damaged. At the very least, research third-party alternatives to your cell provider’s insurance; some provide a better deal at a lower price.
Credit card processing fees: You have to accept credit cards if you want fast payment on your invoices, but take time to research alternative processing providers, says DeKesha Williams, a business strategist with Vizions Consulting.
Technology: Williams also suggests looking closely at things like website fees, your cellphone and office phone service, and fax expenses. Online presence is mandatory, but low-cost alternatives are proliferating for all of these. Check them out.
Utilities: When did you last have an energy audit of your office? Bakke points out that your local power company probably offers that as a free service, and can help you find ways to cut your bill for heating and electricity.
Customers: Wait, what? Cut customers? Yes – within reason. Consider reducing your service area, especially if outlying regions are less profitable. “The smaller geographical area you cover, the more you save on time and gas,” notes Scanlon, the Connecticut CPA. And while it may seem easier said than done, ease yourself out of relationships with the “pain-in-the-neck” clients, he adds. “It frees up time and energy to focus on nice clients.”
Where to spend
Tools and trucks: In the trades especially, your vehicles and your tools and equipment are two of your most important assets. Don’t overpay, but don’t skimp, either, when making the choice of what to buy or investing in maintenance and repairs. “You need your vehicles and equipment in good working order,” says Boyd, the St. Louis consultant.
Technology: You can make smart choices that will save you money on tech, but don’t try cutting it out entirely – tablets, smartphones, networked computers are all here to stay, and they are part of your business infrastructure, whether you know it – or like it – or not, Scanlon points out.
Marketing and service: “Don’t cut down on your social media,” says Scanlon. “This is the way of the world now.” Don’t cut corners on appearance and image, either: prospects and existing customers alike buy perception. And don’t skimp on personalized service, he adds: “This is what keeps your customers coming back and makes you referable.”
To that, DeKesha Williams adds that you can’t simply do without marketing or advertising of any kind. And make sure customer engagement – finding ways to cement the relationship between your business and the people whom you serve – is part of what you’re investing in, she says.
Beyond cutting and spending
Ultimately, whether cutting costs or spending more, you don’t just act blindly. You need to make informed decisions, based on sound evidence and rational analysis – not just of how you spend your money, but of the service, product or provider you’re spending it on.
And as Ron Hequet points out, any cost-cutting campaign is just an emergency first step. The key is what comes next: Creating a plan for growth. “Growth without a documented plan and the preparation of the talent to act is a wish, not a plan,” Hequet says.
And if all you have is a wish, in a year or even less, you’re likely to be forced to make more and deeper cuts all over again. And then you might not even have the chance to decide how you can invest more because the money to do so just won’t be there.
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