The view from the bottom
Want to make more money? Shift the focus from sales to cost control
By Kevin J. Gray
"How big is your company?"
"What were your revenues last year?"
"Are your sales up this year?"
In the business world, most people view sales and revenue as the direct line to success. Yet, while they have no qualms about asking questions like these, would anyone dare to ask, "How much did those new sales cost you?"
Increasing sales is regularly viewed as the equivalent of long-term business success. Yet, this often comes at a high price. Let's face it -- keeping the sales funnel full often takes a Herculean effort, especially in today's economy. But in their efforts to increase revenues, many companies mistakenly view expense control, or management of the bottom line, as optional or at best a secondary priority.
Consider the case of a $12 million manufacturing firm we worked with. When we suggested using a new payroll services provider that would drop $15,000 straight to their bottom line, management replied, "I'm not making a change like that for only $15,000." Using the 3 percent net profit margins that they provided, I quickly pointed out that they would have to book $500,000 in new sales to have that same $15,000 number appear on the bottom line.
But let's look a little deeper into this same firm. The example illustrated above was for one recommendation, but they eventually implemented 15 recommendations in non-payroll cost centers that dropped almost $300,000 to their bottom line. Using their 3 percent net, the savings were equivalent to $10 million in revenues. Now that's dramatic!
The point is that many companies are reluctant to take an immediate, aggressive approach to expense control, but they will jump all over a decline in sales volume. I suggest looking at them in tandem, with equally as much zeal. Don't ignore expense control as a method of increasing net income. But don't expect to find a million dollars under every rock you turn over, either. Knocking a lot of base hits can be a very effective and painless way of bringing significant dollars to the bottom line.
How to do it
How do you take an aggressive approach to expense control? A good start might be to implement some basic internal controls. Some suggestions:
- Audit your staff occasionally. Many employees, though well-intentioned, become complacent in their jobs and miss opportunities to save you money.
- Be on the lookout for fraud. This comes in many forms, some as seemingly innocent as ball game tickets to ensure a continued contract for a vendor.
- Develop cross-functional teams. Have each team review the other's line items. Keep it positive and non-threatening -- just "another pair of eyes."
- Reward employees who look out for your best interests. If someone brings you a good cost-cutting idea, make sure he or she is recognized.
- Create employee incentive programs. Develop a formalized plan for cutting costs and saving money and a way for employees to share in the increased profits.
- Review all authorization processes. "Because we've always done it this way" isn't good enough.
- Meet with your vendors occasionally. Let them know that you are very much on top of your relationship with them financially.
Uncover hidden revenue opportunities
In some cases, you may even be able to turn expense saving measures into revenue opportunities. For example, many companies charge customers for freight. If you use the term "Freight" on invoices, you can only pass along to your customers actual freight costs. However, simply making changes to purchase orders and invoices by having them read Shipping and Handling rather than Freight will allow you the option of charging amounts greater than the actual freight costs.
Your reason for changing could be that you want your distribution costs more accurately reflected on the invoice. Changing to a Shipping and Handling charge allows you to accomplish that goal. Or maybe you aren't concerned about distribution costs and just want the "Freight" line item to be turned into a profit center. Many times these changes can be achieved without ever increasing shipping rates to the customer.
While these steps are a good start, you may decide to take it to a whole new level to achieve high-dollar, long-term changes. If you're serious about expense control, you might consider hiring an outside consultant. An expense control professional can take an objective look at your company and bring a wealth of experience in helping other companies similar to yours achieve significant cost savings.
As you focus on growing your business, think about starting at the bottom -- the bottom line, that is. The view can be really good from down there.
Kevin J. Gray is president and founder of J. Galt Associates, Inc., a cost management consulting group. J. Galt designs no-risk profit improvement programs that have enabled every client they have worked with over the past 12 years to experience bottom-line results.