Finance & Accounting

Learn New Ways to Manage Expenses

Learn New Ways to Manage Expenses

Your products or services might be in high demand, but generating revenue means little if your company can't retain it. Learn how to hold onto the profits you make by managing expenses that you can control.

By Tara Remiasz

As a business owner, it is likely that you have spent more than one sleepless night thinking about a challenge that faces your company. After all, if you’re not constantly focused on how to improve your business, who else will be? Especially when it comes to managing expenses, you probably have the sole responsibility of determining what are acceptable and unacceptable costs.

But, what if you no longer had the burden of being the sole big-picture person? What if your employees began thinking about ways to improve the business? Your expenses would likely go down—and you’d probably get a lot more sleep.

Get the Most Out of the ‘Brains’ You Hired
A major flaw with today’s business world is that owners are bottlenecks for their companies’ progress and improvement, says Lanny Goodman, CEO of Management Technologies Inc., Albuquerque, N.M.  If a company’s owner is the only one bearing responsibility for improving operations, then progress is also limited to the owner’s ideas, available time and order of priorities. The best way to eliminate this ‘bottleneck’ effect is by enlisting employees in the quest to improve the company. But how can a business owner inspire workers to truly care about things such as cost cutting? Profit sharing—an agreement between a business and its workers, by which employees share in some of the company’s profits—is the ultimate motivational tool, according to Goodman.

Most people probably see profit sharing as a benefit better suited for large corporations, but Goodman believes the benefits of profit sharing are universal. Employees should be asked for expense management ideas on a weekly, monthly or quarterly basis, he says. The incentive for employees is that once profit has reached a certain amount, they would receive a certain percentage above that amount. This type of profit sharing is based on the idea that employees have contributed to the increased profits both in terms of generating ideas on cost-cutting as well as working toward these cost-cutting measures.

A secondary benefit of profit sharing is that employees who receive additional financial incentives will be less likely to leave—reducing the cost of turnover, Goodman says. In addition, everyone will ensure that co-workers carry their weight because one person’s performance affects everyone.

If profit sharing isn’t the right fit for your company, there are other methods for motivating employees to reduce costs. For instance, Aldonna Ambler, president of AMBLER Growth Strategy Consultants Inc., Hammonton, N.J., tells workers to ‘find yourself a raise.’ On a quarterly or annual basis, give employees the task of finding $5,000 or $10,000 that is being used for old and inefficient processes. Then redirect that money toward new technology and innovations, Ambler says. Offer an incentive by directing some of the money to workers who devised effective cost-cutting ideas.

Get Centered
Motivating your workers is a good start, however, it will mean little if nobody knows how expenses impact your company. According to Ambler, the primary causes of overspending are:

  1. Workers don’t know how much they should spend.
  2. Workers underestimate how much they can spend and end up having to throw more money at a problem later on.

It follows that the remedy for overspending is creating a better understanding of your budget. More clarity can be achieved by grouping your profit and loss statement into easily understandable categories, Ambler says. Please refer to the Read Worksheet button at the top of the article to use a budget worksheet that Ambler gives to her clients.

Once you have a clear grasp of your budget, compare your gross profit to that of competitors. Use resources such as association industry reports, such as Dun & Bradstreet reports, to determine what your competitors’ books look like. Be sure to compare your company’s cash flow with others in the industry, says Jerome Katz, Coleman Foundation Chair in Entrepreneurship at the John Cook School of Business at Saint Louis University in St. Louis. Then, use these comparisons as a gage for expense management.

Don’t Let Bad Debt Go Too Long
Your company’s success doesn’t just depend on attracting new customers, it depends on the ones you retain. For this reason, it can be hard to take a firm stance with customers who have outstanding debt. Unfortunately, it’s hard to manage expenses if you can’t count on the money that’s suppose to come in.

Business owners tolerate bad debt too long and wait too long before going to collection agencies, according to Katz. “You’re just trying to keep from being stretched so tight that you break,” he says. While payment periods differ by industry—from 30, 60, 90 to 120 days—more than 120 days is rarely acceptable for any kind of business. If you’re concerned that shortening payment periods will offend clients, tell customers right off the bat that someone else—your attorney, your accountant or consultant—is the one pushing you to tighten up payment periods. Another strategy is to offer early payment discounts, such as a 2 percent discount for paying within 10 days instead of paying the full amount in 30 days. By reigning in your customers’ debt period, you create more flexibility to manage your business’s expenses.

Merge Two Industries
Your company may fit into an easily definable category—clothing retailer, box maker, auto-parts manufacturer—but you may benefit from blurring the lines a bit. Merging two distinct industries can allow you to eliminate extra costs while directing resources toward key components, Ambler says. For instance, the immensely popular Cirque du Soleil shows combine theater and the circus. By creating something that is ‘halfway’ between two industries, Cirque has eliminated the need for expenses such as exotic animals on the circus side, and paying big-name actors on the theater side.