15 Oct Some ideas to reduce your costs to increase your bottom line
In my previous post I wrote about growing your sales as the surest way to increase the value of your business. The second method to boost your profitability is to lower your cost of goods sold (COGS) and expenses. Here are some ways to reduce your costs and increase your bottom-line revenue—and thereby increase the value of your business.
Budget and monitor expenses – Managing the expenses of a business is a process that most owners understand. But as the organization gets bigger, the effort to manage expenses gets more difficult as the owner devotes more energy to managing growth. Creating and maintaining a budget actually reduces the amount of work required to manage expenses. Watching the budget and monitoring expenses closely each month is like stepping on the bathroom scale; you may not like what you see— but that’s the point. You see the problem and take action before the issue gets bigger.
Develop economies of scale – The term “economy of scale” conjures up the image of a huge business—thousands of people making millions of widgets. In today’s world, economies of scale apply at a much smaller level. You may have developed a scheduling system or a business process to make you or your staff more productive. By focusing your business portfolio on a core set of products or services, and being as efficient as possible with each offering, you’re creating economies of scale.
Increase efficiency – In a service business, payroll is usually the largest cost. Helping your staff improve their level of productivity is a quick way to increase the bottom line. A 10% increase in staff output can increase margins by 30% or more. Look for tools that can better leverage your staff’s time or increase the value of the services you provide. You may not increase productivity by 10% with a single change, but by focusing on improving your business’ productivity, it helps you keep the spotlight on one of the most important aspects of your organization.
Manage variable expenses at the lowest possible level – The last point is important; you must understand the cost structure of your business and manage it at the lowest level possible. That’s not micromanagement; it’s knowing that anytime a cost changes, you have to be able to spot it quickly and understand whether it’s a one-time event or the beginning of a trend. The budgeting function makes this an easier task.
You probably have other ideas to reduce costs in your business. The main point is that if you manage your costs and increase your staff productivity, every dollar that you save falls to the bottom line. And with valuation multiples of 3x or more for a good services business, you can achieve a tremendous return for your effort.
