A 3-point plan for getting small business expenses under control

by on October 10, 2012

This is a guest post by Joe Pawlikowski.

Small business expensesIf there are words you never want to hear from a business partner, they are, “We’re kind of low on cash.” Because they never mean “kind of.” They mean severely, and they’re probably bracing you for something bigger. When my business partner said those words to me, he followed them with, “We’re going to have to take out another loan.”

This was a personal affront of sorts. We’d worked hard in the last five years to build our business, and I thought we had reached a cash flow neutral state. But we had not. Our expenses had run up, leaving us stuck. On the spot I decided to get this situation under control. As he went to the bank to ask for more money, I sat down and composed a plan to cut our expenses.

We identified three main types of expenses: recurring, one-time, and cost of sales. By examining each of these, we were able to reduce the amount of money we spent, which clearly improved the bottom line. Acting on this plan also seemed to give us some more focus on the earnings side; we increased our sales by over 40 percent the following year (i.e., this year), further improving the bottom line. Here’s how we boiled it all down.

1. Recurring expenses

As with most, if not all, businesses, our greatest recurring expense was payroll. But we didn’t want to cut that. We had a team we were satisfied with, and we felt that cutting one of them for non-performance reasons would disrupt the flow we had going. And so we moved onto the bills that landed in our mailboxes every month. Here are some examples.

Rent. Since there were a few vacant offices in our complex, we knew the landlord was happy to have our business. If we moved to different offices, he’d not only be out the money from us, but also the money for filling our space with new leasers. Since he was already spending money to fill the then-vacant offices, we knew we had some leverage. And so we asked for a modest 4-percent rent reduction. He didn’t like it very much, but in the end he obliged.

Electricity. This one was easy enough. We simply encouraged everyone to turn off their computers at the end of the night, rather than putting them in sleep mode. We also turned down the thermostat two degrees in the winter (though up only one degree in the summer). Hardly anyone noticed. Essentially, we made it part of our team culture that we conserved electricity. The savings became apparent within a month or so.

Water. Like many offices, we had water jugs delivered every month. It wasn’t cheap, but it kept everyone happy. At first we thought about reducing our number of bottles, but the employees did use them all. Our solution: buy bottled water in bulk. It cost us less, and it further justified the presence of the hardly used refrigerator. At the end of the day one person would dump the recycle bin into the recycling dumpster outside.

These are but a few examples among many. The point is to go over any expense that recurs regularly and find ways to reduce consumption or cut it altogether. For instance, we cut the cable TV from the break room. Our employees didn’t at all mind, since they could just watch what they wanted on their iPads anyway.

2. One-time expenses

How does a company deal with one-time expenses? Usually these are for necessary items and services. It’s tough to reduce costs when buying a new set of computers. The same goes for bringing in someone to repair equipment. After thinking on this for a while, we decided to simply create a new rule for one-time expenses. Every time we had to approve one, we set a stopwatch for 10 minutes and sat around a table. The instruction was to ponder this question:

What will happen if we don’t buy this?

It turns out that in many instances none of us could come up with anything. What will happen if we don’t buy this? Pretty much nothing. And so we’d decline the expense and move onto the next one.

What will happen if we don’t pay this programmer to build us new database query software? We’ll continue using the old one, which works fine right now. Decline.

What happens if we don’t buy priority shipping for this recent batch of widgets? We’ll miss a deadline and potentially lose hundreds of sales. Approved.

3. Costs of sales

While cutting recurring and one-time expenses did help save us, we believe that examining and paring our costs of sales helped even more. That’s probably because we hadn’t considered them before — that is, we hadn’t considered working to reduce them. If there is one aspect that led us to increase our sales so greatly, it was from focusing on the costs of sales aspect.

How’d we handle it? We started by looking at our biggest cost in terms of customer acquisition: marketing. We were spending money on display ads, on PPC campaigns, and on social media efforts. After examining the cost per lead on each of these, we decided to rearrange the pie. Display advertising brought us nearly nothing, so we completely cut it out. PPC cost us the most, but also brought us the most business — so we actually increased our buy. At the same time we changed our social media focus, hoping it would provide a cheaper way to generate leads.

Each small business will handle this discussion differently, of course. If PPC isn’t sending you business then it’s useless to increase your buy. If display ads are doing well, you might consider changing your creatives. And on and on. The point is that we never sat down and considered each of these marketing factors in the contexts of the others. I suspect many other small businesses have not, either.

Then we get to the cost of the sale. Yes, it costs money to make a sale thanks to credit card processing. When you sell things exclusively on the internet, this becomes a necessary cost. We started examining all possible options to determine which company had the best rate with the most flexible terms. As you might imagine, this wasn’t the easiest process, since so many options exist. But that’s all the more reason to find the right one.

With these three aspects combined we were able to shave a significant portion of our expenses. That helped regrow our bank account, allowing us to repay that unfortunate loan and get back into the cash flow positive habit. It might seem simple in retrospect. You might read this analysis and go “duh.” But so many businesses have problems like these. When you’re a small-sized business, every penny counts. Spending time analyzing these expenses made all the difference for us.

In addition to running a small business, Joe Pawlikowski writes and edits content on the web. He keeps a personal blog at JoePawl.com.

Comments, likes and tweets are always appreciated! Did I mention that I LOVE your feedback?

Image courtesy of cooldesign/ FreeDigitalPhotos.net

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