There are several ways to grow or increase profitability in a business, but the easiest is often overlooked, reduce expenses. The first goal of any business is to reach profitability, once you are profitable you want to continue to grow your sales. Sales growth can be achieved through new customers, increase value to existing customers, and increase size and/or frequency of transactions. Many businesses are great at increasing sales, but increased sales does not always translate into increased profits. Increasing sales has a cost or expense associated with this growth and may not be the most effective way to increase profits. Let’s look at a hypothetical business and how the results of growing sales versus reducing expenses.
Company X currently has a 10% profit margin and wants to grow profits by 20% next year. For every $100,000 in Sales the company profits $10,000 or 10% of sales. We will assume that Direct Costs will be consistent at 35%, Salaries & Taxes with be 35% and
Overhead is 20% of Sales Revenue. Let’s look at the current business and 2 options to increase the profits by 20% or $2,000.
Option 1: Increase Sales by 20%
Company X grows sales by 20% or $20,000 using one or more methods mentioned above. With the increase in Sales Revenue the expenses for Direct Costs, Salaries and Overhead all increase in proportion to the increase in Revenue. Company X achieves its goal and profits grow by 20%.
Option 2: Reduce Overhead by 10%
Sales do not increase in this option. Sales stay flat along with Direct Costs and Salaries & Taxes. However, company X looks at their Overhead expenses and identifies several ways to reduce these expenses. By reducing these expenses by 10% or $2,000 the company reaches its profit goal of 20%.
A business does not need to increase profits through sales growth. Most businesses overlook the opportunities to reduce overhead expenses and grow their profits. Business owner’s must look for opportunities to reduce or cut expenses on a regular basis. Several options include is the expense necessary, can you get a better price from another vendor, or joining a Co-op or Group Purchasing Organization like Maxx Purchasing to leverage the buying power and accessing their agreements to get better pricing.