Has there ever been a more difficult time even trying to maintain profit levels, regardless of increasing them?
Decreased margins, increased labor and material costs, increased competition, increased marketing, operational and administrative expenses, higher product costs, and higher taxes are just some of the many problems you face to beat the gains.
All of which apparently makes even maintaining profits extremely difficult for many companies and almost impossible for most.
Yes, being in business today can be a very complex and overwhelming process, but I assure you that making a lot more money is quite simple.
Being in business today can be a very complex process, but making more money in business is not that complex. The basic business formula is that your earnings are equal to your income minus your cost.
Any way you look at it, there are really only two basic ways to increase your earnings.
You can increase sales or reduce expenses. The overwhelming majority of business owners and managers in this country believe that the most effective way to increase profits is to increase sales.
Countless books have been written on this subject and every day, in every city of the country, seminars are held teaching companies how to increase sales.
The priority of most business owners and management is finding ways to increase sales. They plan, set goals, develop new products, hire new salespeople, make sales, and actively seek an increased sales and customer base in thousands of other ways.
Yes, increasing sales is the top priority for most companies; in many, it is the only priority.
But trying to increase sales costs money. In most cases a large amount of money. Marketing costs money. Advertising costs money. Hiring more salespeople costs money.
Each of these efforts can seriously hamper your cash flow and no one can guarantee that your profits will increase.
But there is another way to increase profits. A much easier and much more effective way to generate significantly higher profits while dramatically improving cash flow.
Think about this; If you increase sales by $ 10,000, you can have a pre-tax net profit (after selling expenses, operating costs, cost of goods sold, etc.) of $ 200 to $ 500 if you are like most businesses. showing a net profit before taxes. 2% -5% per year or less.
That’s right, for every dollar that increases sales, you only add a couple of pennies to the bottom line!
Now think about this; If you cut costs by that same $ 10,000, you just increased your bottom line by $ 10,000. The cost was zero. In fact, you’ve improved your cash flow by eliminating the cost associated with trying to increase sales and the $ 10,000 you saved.
You see, cutting expenses costs nothing, saves significant amounts of money, dramatically improves your profits and cash flow, often increases productivity, and has myriad side benefits for any business.
The dollars saved by reducing expenses and controlling costs have an immediate, direct, and very dramatic effect, in the short and long term, on your company’s profit image.
But few companies make a serious and continuous effort to try to reduce or control costs. Those who do can spend only a fraction of the time and effort they put into trying to increase sales by lowering and controlling costs.
Imagine not paying much attention, if at all, to 50% of your success formula. But this is exactly what happens in too many companies. I would bet this is exactly what happens in your company.
Rising and uncontrolled costs are hurting your business in hundreds of ways. Rising costs deplete profits and devastate your cash flow.
Uncontrolled costs can make your business bankrupt.
Controlling costs and reducing expenses are perhaps the two most neglected areas of management in any company. However, they are certainly the two areas for improvement that will have the most dramatic effect on your bottom line, and indeed your entire operation, with the least amount of effort.
But, as with each of us, the quickest path to improvement is usually to look inward. Unfortunately, most companies, like most people, will only look inward when all other options are exhausted.
Think about these examples. A $ 4,000 reduction in costs for a business that has a 4% pre-tax profit rate equals a profit on sales of $ 100,000. A 1% reduction in costs for a company that has $ 10,000,000 in sales and a pre-tax profit ratio of 5% puts $ 95,000 before tax in the bottom line.
This means that the profits of this company went from $ 500,000 to $ 595,000 simply by reducing costs by 1%. They just increased their pre-tax earnings by 19% simply by reducing their costs by 1%. Think about it, a 19% increase in profit before tax without increasing sales a penny. To achieve this same increase in profits through increased sales, this company (at a profit level of 5%) would need to increase sales by $ 1,900,000.
I assure you that few things in business can be accomplished with less effort that have such a dramatic effect on your bottom line.
Thinking in these terms will reinforce the dramatic effect that cost control and cost reduction can have on your bottom line. Clearly, the money saved by reducing expenses and controlling costs can have a very direct and massive effect on your company’s profit image, with a fraction of the effort and cost of increased sales that would be required to produce the same increase in profits. .
But few companies make a serious and continuous effort to try to reduce or control costs. Those that do can spend only a fraction of the time and effort that they put into increasing sales. Oh sure they can talk about cutting and controlling costs and they can even take some obvious steps to do something about it, but usually that’s the scope of their short-term efforts in this area.
But this is exactly what happens in too many companies. I would bet this is exactly what happens in your company.
Isn’t it time to change this?