What drove you to start your business? Maybe you had an idea for a product that filled a need, or maybe you just wanted to help others. Maybe your business venture was a method for giving back and changing the world. Or maybe you’re an accidental entrepreneur; someone who found that their hobby or passion had morphed into a full-fledged business. No matter what your initial reason for launching a business, a common goal for business owners is to constantly improve profitability and keep their business on the right track.
Is the company making money and able to meet its financial expenses? Is profit growing or has it remained flat or even declined? As virtual CFOs, we work with clients in multiple industries to tackle profitability goals. One avenue of improving profitability is an in-depth review of your costs.
COSTS: DON’T JUST SET ‘EM AND FORGET ‘EM
Product- and service-based businesses alike can improve profitability by reviewing expenses and uncovering ways to reduce costs. You might be leaking money in unexpected areas or spending more than necessary in others. Here are six areas of your business where you might find ways to reduce your costs and increase your bottom line.
Reduce cost of goods sold (COGS) and operating expenses.
All businesses require input to make money. Your cost of goods sold are the direct inputs related to your service or product delivery. Are yours slowly creeping up and eating into your profit margin? It might be time to explore ways to reduce your COGS. A variety of methods can be considered. It may be time to eliminate unnecessary product or service features by considering what product and service lines are most profitable and eliminate the losers to focus on the higher profitability lines. Starting with an industry benchmark to determine how your company measures up to the industry averages can provide valuable insight as to where you might be off track. Maybe your materials or labor costs are higher than industry average. If so, dig deeper into what is driving those higher costs and make adjustments to bring them back in line. Examine your entire production and delivery process from start to finish and identify areas that might be made more efficient.
It’s also important to regularly review operating and overhead costs. Have your utility costs increased? What about insurance policies and employee benefits? Expense items can often be renegotiated or alternative providers may offer more competitive rates. Keeping tabs on expenses can assist in managing cash flow as well, which is critical for continued business success but is often neglected as business owners get busy with their day-to-day tasks. Consider, however, what finding a 2% decrease in costs would mean to your bottom line over a 12 month period. For example, if you are a $1M revenue company and you have net income after expenses of $200,000 (so your retaining 20%), a 2% decrease in costs would add another $20,000. Think about what you could do with that!
Search for new suppliers or renegotiate terms with existing suppliers.
Have you outgrown a supplier’s capabilities? Have their rates increased over time to a point where they are no longer competitive? We recommend regularly reviewing your vendor relationships to make sure they are still financially viable in your supply chain. This could be an area that could easily improve profitability with a simple conversation.
Don’t ever hesitate to ask suppliers for discounts, especially those that you work with frequently or spend lots of money with. Other items you could negotiate with suppliers include financing terms and reduced shipping costs, or ask about any other benefits they might have available to you that you don’t know about. You’d be surprised how simple this can be with certain suppliers if you simply ask.
Purchase larger quantities for better prices or discounts (if cash flow allows).
Taking advantage of price breaks based on volume can reduce your costs, especially if you’re purchasing items that you order frequently or can be stored for long periods of time. Ordering larger quantities can reduce costs related to shipping and delivery costs. For example, as a dental CPA, we frequently see areas where they can take advantage of discounts by placing larger orders for necessary supplies.
If the items will spoil before they are used, however, or if it will put a strain on cash flow, it’s better to stick with ordering smaller quantities more frequently.
Go digital.
While today’s technology tools have made it possible for many businesses to go completely paperless, many are sticking to their tried-and-true pen and paper methods. The dental industry, for example, has lingered behind its other medical counterparts in adopting electronic record-keeping systems, believing it to be too much of an inconvenience and expense to switch.
Moving to a paperless (or paper-reduced) system can provide a range of financial benefits for most small businesses. It reduces printing and paper costs and leads to greater efficiency and fewer errors. It can also reduce the amount of storage space needed and eliminates time spent searching for physical files. Paperless systems also make it easy to transfer information to outside consultants, such as CPAs or attorneys.
Certain tasks and functions can operate more efficiently with lower costs in a virtual setting. In a dental practice, you may be able to employ an off-site administrative position for simple data entry or utilize texts and emails for appointment reminders. These options can help improve the level of service you provide to patients as well, without breaking the bank.
At PJS & Co. CPAs, we utilize a Secure Client Portal that allows clients to send files electronically, eliminating the need to print and send a large stack of paper records.
Monitor for employee theft.
In a 2017 CNBC article, it was reported that employee theft costs US businesses $50 billion a year. The theft included embezzlement, taking parts and products from inventory, sneaking cash from a register, and even swiping office essentials such as toilet paper. Theft tends to hit small businesses the hardest, because they are often unable to absorb the financial loss. It’s also difficult to take a blow to the trust that business owners put in a small staff.
Putting a system of checks and balances in place is the best defense against employee theft. If one person is predominantly responsible for managing the company’s books – common in many small businesses – it’s important to have a dedicated second set of eyes reviewing all incoming and outgoing transactions. A CPA can be a beneficial overseer of these tasks and can act as an impartial third party. If you choose to work with a virtual accounting firm, regular bank reconciliations, accounts receivable review and other controls can be established. You can also implement regular counts to make sure inventory levels are where you expect them to be. A good CPA can help you setup and implement internal control processes appropriate to your business.
Train employees to minimize waste or loss.
Profitability can also be improved by reducing waste throughout the office. Ask employees to print two-sided wherever possible, and even think first before printing a document. Encourage staff to turn off lights or electronics when not in use to save on electricity costs. These little measures can add up to big cost savings over time when they make sense, “just don’t trip over dollars to save pennies” as labor cost is typically one of the highest costs in any business. So as long as it is still efficient, implement it!
Reviewing costs across every aspect of the business isn’t just a one-time task. It must occur regularly to ensure that the company is operating as efficiently as possible. And it’s not just the responsibility of the business owner; every team member can be empowered to identify areas where waste and unnecessary expenses can be removed.
Work with a Growth Advisor or vCFO
Another consideration would be to work with a growth advisor or virtual CFO who can provide further insights like industry benchmarks, help define meaningful KPIs for your specific industry and business model, establish better procedures to manage and track these numbers and more. If your current accountant has the capacity to provide these services, it is well worth the investment because you will reap the benefits in working with a qualified advisor. Our firm has the capacity to provide all accounting services, but we are also more than happy to work with current accountants, CPAs and tax preparers to provide the business growth and profitability advisory services your business needs to really leverage your accounting reports and push your business forward.
Taking the time to review the steps above can be a critical turning point in your business, ultimately bringing you back to the WHY. Why did you start your business in the first place? What you were looking to achieve when you began? Without a focus on improving profitability, it is difficult for your business to maintain the same mission and do what you originally set out to accomplish in the first place. Running a successful and profitable business will allow you to focus on and realize your dreams.