While it’s common for businesses to be most concerned with the volume of sales, this is not necessarily the only, nor most reliable, way to raise profits. In fact, the cost of making a sale can sometimes lead to lower than expected net profits.
Business owners must consider their overall expenses, including cost per acquisition, as they aim to increase profits. Here are four areas to focus on when reviewing expenses and considering cost-cutting measures.
1. Costs of Labor: Did you know that employee benefits like health insurance and retirement contributions account for nearly 30% of employee compensation? As you calculate your total labor costs, be sure to include these figures in addition to salaries and wages.
While you want to be competitive in your total compensation and benefits packages, it’s also important to compare your offerings to those of similar roles in your industry. If your amounts are skewed higher or lower than other employers, you might want to reconsider your pay structure, salary amounts, or bonuses moving forward, at least in the short-term. If you need to reduce salaries or explore different benefit options to rein in spending, be mindful of how this can impact morale and turnover rates. It is wise to consider other ways to show appreciation for the value of your employees’ work, such as offering flexible work schedules or employee incentives to help them achieve their goals.
2. Relationships with Vendors: Whether or not you are trying to cut costs, it’s generally a good idea to evaluate vendor contracts regularly to verify that each line item is still necessary for your business. Consider each vendor you work with (suppliers, cleaners, landscapers, technology firms, and other service providers) to ensure you aren’t duplicating services. You should also consider whether you are paying a vendor for work that could be reassigned to an existing employee’s workload.
A final consideration is the potential to renegotiate vendor agreements and leases for property or equipment. It might be possible to work out a better deal, especially if you have a positive, long-standing relationship. If negotiations aren’t working, it might be time to research other options for those services.
3. Efficacy of Advertising: Ad campaigns can be one of the biggest drains on your budget, especially if they are not effective with your target audience. Excessive spending on ineffective campaigns can be a huge drain on funds. If you’re seeing sluggish or stalled results, brainstorm with your advertising agency on ideas to boost your return on investment or ROI. It is also worth a look into other agencies that might be a better fit for your budget and goals. While fresh ideas from a new agency can increase sales, you should also talk openly with your current agency about how they can help before jumping ship.
4. Impacts of Interest: It’s common for businesses to borrow money for real estate, equipment, and operations, but these can carry a hidden, or often unconsidered, expense. The hefty weight of interest can be a game-changer for business profitability, depending on rates. If rising commercial interest rates and the flux of variable-rate loans are draining your budget, it’s time to reconsider those lien-burdened operational expenses. Are they helping to generate more money than the cost of the interest?
If not, you may need to brainstorm ways to lower your borrowing costs. This may mean switching to shorter-term or fixed-rate loan options or exploring ways to run your business more efficiently and, thus, operate with lower line credit.
Even if your business isn’t experiencing profit pain points, it’s smart to implement a plan for continuous process improvement. Review your operations expenses and assess each cost's ongoing need and reasonableness.
If something is dragging your budget down, it might be time to cut that cost. However, remember each decision you make impacts other areas of your business and can even hinder productivity and growth.
Reach out to a Smolin Advisor for support evaluating costs to ensure the overall health of your business.