Approximately 80% of small businesses are break-even businesses. A problem faced by many businesses is that as their revenue grows, so do their expenses. To run a successful business, your revenue must exceed your expenses.
A penny saved is a penny earned. This age-old adage applies both to your personal life and your business.
Help your business by looking for ways to trim the fat. That’s what I’d like to examine today: how can you reduce the operating expenses of your business? It’s time to impart five pain-free strategies that I’ve used to help businesses of all sizes reduce their operating expenses.
1. Look at Your Monthly Recurring Expenses
Log in to your accounting system or bank account and look at monthly recurring expenses.
What are you:
- Not using at all
- Not getting enough out of
Perform this audit at least annually, but it’s well worth doing even monthly.
One easy trick to closely manage your recurring expenses is to cancel your credit card and request a new one. Every single monthly expense will then require your new credit card information. You’ll have to make the conscious decision to opt back in, or to let the expense go by the wayside.
2. Look at Your Income Statement for the Highest Cost
Sort your income statement by the highest cost to the lowest cost. Look for opportunities to reduce your highest cost. If your highest cost is travel, it might be time to telecommute instead of meeting clients in person.
If your highest cost is labor, you might have to take a look at reducing your labor expenses. You certainly don’t want to lose any of your help, but sometimes you have to make the tough decision to let someone go. I know I promised a pain free strategy, but this one can be painful. Look for people who are not A players and consider letting them go for the betterment of the company.
3. Evaluate the Real Needs vs Perceived Needs
What do you actually need to start your business? Do you need a new office? Do you truly need a new laptop?
Everyone has a tendency to spend money on things we don’t need when starting a business.
Instead of a new fancy office and fancy desk, look at what you actually need to get your business going. How many businesses started in a garage? Amazon, Apple and Google to name a few.
Rigorously examine every expenses to see if it’s something you truly need to start that business. Objective opinions from other people can help you make these decisions.
Try to delay expenses as much as you can. Look for creative solutions to get things done without breaking out that credit card. Instead of moving into a new office, set that money aside for a few months and make sure that your business is operating successfully – and profitably.
4. Fire Your Worst Clients
Sometimes the best way to increase your revenue is to fire your worst client. If you are spending too much time with a client for silly reasons, it might be time to let them go.
Take the time to rate your clients on a grading scale and get rid of the F’s. Alternatively, take the time to have a tough conversation with your clients to try to turn them around.
5. Implement Profit First
When we are given a set amount of resources, we tend to use those resources. If a company has a certain amount of cash available, they tend to use all of that cash.
Instead, practice the Profit First method. Set aside your profit and reduce the funds that are available for operating your company.
Have you ever had someone in your household increase their 401K plan by 1-2%? Do you even notice that the income is missing? Not really, you adjust to the available amount of cash. You’ll go out one less time per month, buy fewer groceries, and overall make adjustments to your personal income.
The same rule applies to your business. If you set aside the profits, you’ll essentially hide them from yourself and make adjustments within your business to work with the available operating expenses.
Final Thoughts
By reducing your operating expenses using the above strategies, you’ll trim the fat and have more room in your budget for growth. Choose every expense carefully, reduce your highest expenses and implement the Profit First method.
Have you used any of the above pain-free strategies for reducing operating expenses? How have they worked for you? Let us know in the comments!