Ever heard the advice "You just need to spend less money"?
While this may be great advice when it comes to your personal finances, looking at things this way when it comes to operating your business could hurt your profitability.
Check out this week's episode as we share some stuff your bookkeeper probably isn't telling you.
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Episode Show Notes :
Cost effective planning
This is part 2 of the profitability series and a very important topic at that but for those that are just tuning in here is the the full list of topics in the profitability series:
So here is the list:
Cost effective planning
One of the most critical aspects about profitability is how you manage your cost and I am not talking about the small changes that the most basic bookkeeper would say like … take less trips to Starbucks for coffee or change your cell phone plan. Those maybe good options but for most businesses they are not going to drive your profitability in any extreme way.
But on the other hand what will drive your profitability is being smart about how you plan your cost. The overall goal is to make sure you tie your cost as closely as possible to revenue generating activity or in simple terms make sure most of the money you spend is related to something that actually makes you more money.
Step 1 would be make a list of all of the things that you spend money on - now this can help if you already have a Profit & Loss or an Income Statement, now if you don’t know what that is and you are working with a bookkeeper/accountant then you might need to fire that person today because this is level 1 basics of what they should be helping you understand.
In your P&L or Income Statement your expenses are separated into categories which give you an idea of where you are spending your money. Each category like Dues/Subscriptions, Software, Bank Fees, Marketing, etc. tells you a story and you need to understand this.
Step 2: Ask yourself of all the things that I am spending money on what is directly helping me make money. Now this is where a lot of businesses start seeing huge opportunities, because when they look at all of the things that they are spending money on 20% of the money they spend is actually related to things that are helping them make more money like Staff that is billable, marketing and advertisement,
Step 3 ask what types of cost are indirectly helping me make more money for example the software systems that you use is helping you serve your customers well
Step 4: Start looking for ways that you can start spending less money on the things that are not helping you make money and more on the things that are helping you.
If you are looking for an advanced step start setting targets for the types of things that can help you make more money, for example:
Networking with potential clients - is 0.5% of your expenses maybe increase that to 1.5%
Payroll for client facing staff is 18% what if we hired more client producing people do we have enough work for them to do
Something that we will cover more next week involves looking at ways to improve your process, truth be told this area is where a lot of businesses including my business find opportunity every year especially for me because as we grow I find that I need to delegate more work to the staff but if we do not have a good process I end up having to use my time and the staff members time to get the work done but if we have a process I can delegate and then go focus on something that is more important.