Want to Increase Your Profits? Don’t Cut Your Costs; Increase Your Business

Costs

Profits are down, and expenses are up. What now? If your first inclination is to cut costs…stop! Before you do anything drastic, you need to take a deep breath and step back.

Cutting costs is often a gut-level reaction. And it is not always the smartest one. The businesses that survive and prosper are the ones that explore all the possibilities and make an informed decision as to what is the best plan in returning their business to profitability. It may mean making cuts—or it may mean making changes.

Sometimes, what you spend your money on is more important than how much money you spend. If you bring out the hatchet prematurely, you may end up cutting the wrong kinds of costs, which will ultimately hurt your business in the long run. For example, if you cut your supply costs, you may end up with an inferior product. If you cut your marketing costs on your products or services that sell very well, you may cut yourself off from future profitable business. The same thing applies to your business development budget. Spending your business development dollars in the right place can earn you money down the road. Choosing where to make cuts, if any, is crucial to your business’s success.

Evaluate all your options and then decide if those cuts are the best way to increase your bottom line. You might be better off just allocating your resources differently. To learn how to evaluate what route your business should take, follow these tips.

1. Know what each project or product costs.

If your company is not making a large enough profit, determine why. Don’t just look at the overall picture—break it down. You need to be able to distinguish the differences between the profitability of each product line or project. Not every project or every product is the same. Some of your offerings bring in less profit than others.

Establish a system that captures the cost for either each project or each product line. This includes all the direct costs that are associated with the item you’re measuring, as well as its share of the related costs—the ones that are necessary to run your business but not attributable to a specific project or product. (In other words, your overhead.)

For example, if your company produces lamps and chairs, first you’d single out the lamp. Allocate the costs of the parts and labor required to make the lamp, and then the share of overhead associated with the lamp portion of your business. You can’t judge whether something is making money just by simply looking at the component parts that went into that lamp. You need to consider workers’ salaries, facility expense, selling costs, marketing, advertising, etc. Know what your total costs are to produce lamps. Then repeat the same process for the chairs. Now you know exactly how much you are spending (and earning) per item.

2. Know what you are making money on and what you’re not.

If you don’t segregate all your costs out for your different projects or different products, then you will have no way of knowing if making the lamp is more profitable than making the chair. The lamp may be more profitable because either the chair is a bad seller or it costs too much to import the parts. But you won’t know that until you separate your costs out accordingly. Don’t just guess. You need cold, hard, numbers.

Likewise, if you’re in the services business, you may find that you make more money providing one service rather than another. You need to track all the time you invest in a specific project and how much that pays you, and then break it out into units so you can measure the profitability for each project. You may be surprised to find that you are investing more time (and resources) in one project than another.

Keep track of every client and every project you do on an on-going basis so you can track how much each project paid and what your profit margin was. Only then can you begin to make a decision regarding what changes to make in your business. Use the numbers—don’t make an emotional decision.

3. Increase sales on what you do make money on, but don’t necessarily get rid of the others.

Look at other alternatives. For example, are there ways to effectively cut costs associated with that product? Are you in the wrong market? Are you providing the right service to the wrong people? Is your marketing plan effective?

Instead of being quick to make cuts, consider refocusing your business. If one area of your business is more profitable and enjoyable for you, focus on that part. Channel your expenditures into this direction. If one line of your business costs you more time and money to manage it than is worthwhile, you may need to get rid of it.

4. Examine the “losers”—those things that are not making you enough money.

When you know what is bringing you the least (or no) profit, can you change something to make it more profitable? Or, do you need to eliminate that product or service? Would it make sense for you to subcontract it out? Could you give that business away to another company that wants to provide that product or service? What can you do differently with that “loser” product or service?

What did you learn from capturing and analyzing the information about your business? You may find you enjoy doing one piece of it more than another. You may learn that you spent less assembling that chair than you thought you did, or you may be able to cut costs further without impacting the quality of your product. Now you can apply the same logic to things that are doing well for you. Is there a way to make your profitable items even more profitable?

Don’t just think about the things that aren’t doing well for you; be more aggressive with the things that are. Consider marketing your offerings differently or more aggressively to expand to a new market, or penetrate deeper with your current customers. By concentrating on what you do well and doing it even better, your business will become much more successful.

Take Action Now

Without knowing why your business isn’t as profitable as it should be, you won’t know where to make changes. Become a numbers person, if just for this exercise. Break out exactly how much each product or service costs you and how much profit you earn from it. You may be surprised at your findings. Analyze your data carefully, and then decide whether you need to make cuts or changes. When you can ignore your gut-level reaction to cut costs and make an educated decision, you will be able to make the right changes to make your business grow and prosper.

See Entrepreneur article: https://www.entrepreneur.com/article/240853