Controlling Expenses Is Critical To Profitable Business
For years I’ve been saying that smart businesses focus on growing sales, not on cutting expenses. “You can’t cut your way to profitability” is one of my favorite sayings.
In business, a dollar earned is roughly equal to a dollar saved since taxes are based on your profits, not income. Essentially, you are taxed on your income (sales) minus expenses. Sales and expense control are roughly worth the same. The problem is that it is easier for most people to focus on expense control that on top end (sales) growth. And after you hit the obvious expenses, you spend more and more time on things that save you less and less money. It is the 80/20 rule in reverse, where you find 80% of your savings from the first 20% of expense cuts. Also, you are limited on how much you can cut expenses, while your ability to grow sales is essentially limitless, so it makes more sense to focus on growth than on frugality.
So my basic advice is for entrepreneurs to focus on sales.
I still believe this, but that doesn’t mean that I’m saying that you should ignore your spending. That would be a big mistake. First of all, spending problems grow faster than income. What is a minor issue at $30k per year income is a massive problem when you grow to $300k per year. The second reason is that expense control is initially easier to do than sales growth. Your first swing at expense control will net you the biggest gains. Subsequent attempts at expense control will be more difficult, less effective, and often affect critical business areas like productivity or quality.
The key is to be smart with your cost cutting.
What’s my favorite area to cut costs? It’s saving energy through energy audits or energy management. At this point a little disclosure is needed: I am an energy consultant and get paid to help companies reduce their energy spending. I do energy audits for my customers and typically cut their energy bills by more than 20%.
- Now that we have cleared the air, let me explain why I like to focus on energy spending:
- Most of my customers are manufacturers, and they spend a lot each month on their energy bills. This is a big area of concern to them.
- Even if you are not a manufacturer, utilities are still one of your largest expenses.
- Most companies can cut their energy spending by 20% or more. I’ve seen savings as high as 59%! I can’t think of many areas where you can save this much.
- Energy Management is an area where you can cut expenses while increasing output. Any other expense cutting will ultimately reduce production or quality.
7 Responses to “Controlling Expenses Is Critical To Profitable Business”
John Newland
When a company is small and new, it is generally also underfunded. As you say, getting the most bang for the expense buck is what will allow you to survive as you drive sales.
Learning how to do your sales and marketing is worth its weight in gold. Again, you have to drive sales. But you don’t have to go broke doing it.
For marketing and sales, use all of the free media that the internet presents. blogging can be free. facebook and twitter are free. You can keep getting your ideas and products/services out there without spending a lot of money.
Always remember when you are starting, money is what you trade for time. If you have money, you can do it faster. Most people starting a business don’t have money. In that case, learn to use the internet as your bullhorn, and learn how to find and build communities.
Mark Fuller
I hink you should be more focused on your core competency then reduce the cost of your core IAM platform by 80% as well as reducing your operational costs. This way you can benefit and save from your spendings but still running your business smoothly. I like your post, it’s worth reading!
Jason
A company with 60,000 in revenue and 5k in expenses is more profitable than a business with 800,000 in revenue and 750k in expenses.
Brandt Smith
@John – You are right about startups being underfunded, but expense control is critical for all businesses. It is more critical for startups since they usually have no reserves. That being said, larger companies have the same expense problems, but their size is significantly bigger. Either way, their expenses are proportional to their size.
As for focusing on sales and marketing, you are 100% correct. This is the part that most entrepreneurs find challenging. They may be great at product creation. They may be great salesmen. Heck, they may have done marketing in their past lives. The challenge is that small business marketing is different. It’s all about results, and is often done on a tight (or non-existent) budget. And it’s often done by people who have no clue on marketing!
@Mark – I agree that most of your attention should be focused on your core competency. That doesn’t mean that you should overlook other areas. Most of the time the entrepreneur is an expert in product/service creation. They are the “guru.” On the other hand, they often stink at marketing or business management. If you (or your team) don’t do all three well you are in trouble.
The answer…outsource your weak areas and spend more time on your area of expertise. Since this post was on controlling your energy expenses, the outsourcing method is to hire an energy consultant. If your weakness is marketing, hire a marketing consultant.
Bas @ profit tempest review
great thoughts and smart advice. good post
Benjamin Loke
Energy cost indeed eats a huge percentage of a company’s profits and big companies may give you the impression that they shrug off huge electric bills but sometimes, the reason why they became big is because they save on energy a lot.
Jane
After attempting so many businesses and failing in most of them, I figure that beginners would have a hard time controlling their expenses even if they want to and the only time that they can really have full control over the company’s expenditures is when they are already on their way to stability. The first few months are critical so you really need to have a lot of funds to put up with your possible losses. You will be lucky and really resourceful if you don’t have to go through these.