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.