We live in a world in which we always want more. We spend more money, so we strive for more revenue or income, and then we spend more money. It’s a never-ending cycle.
It seems that the more money people make, the more they spend. A business owner might think that generating more revenue would be the solution to this problem; however, expenses will always catch up to revenue without some kind of management.
Businesses should aim to grow revenue consistently, but they will never become profitable by revenue growth alone. Expenses must be controlled in order to ensure the desired level of profit.
Key Expenses to Manage
Monitor and review these key expenditures:
- Cost of goods or services
- Personnel (salaries, payroll taxes, fringe benefits)
- Advertising and marketing
- Training and development
- Travel expenses
- Equipment, office rental, and facilities
Cost of Goods or Services
The cost of goods or services can include direct materials, labor, and overhead that go into the production of each good or service. This cost is subtracted from the sales figure. In some industries, the cost of goods and services can be as high as 70%. To control these costs, businesses need to streamline and differentiate themselves in order to grow margin without losing business to competitors.
Personnel (Salaries, payroll taxes, fringe benefits)
When can you hire? What is the fully loaded expense for an employee? Also, when do you use a contractor, and when do you hire?
There are two approaches to handling personnel expenses.
- Target Allocation Approach
- Revenue by Person Approach
The Target Allocation Approach assigns personnel expenses to stay at a particular percentage of total revenue. For example, if you choose 30%, then you adjust all of your personnel expenditures including salary, bonuses, payroll taxes, insurance expenses, 401K match, and any other fringe benefits to stay at 30% of the total revenue. If expenses go up or down, then adjustments need to be made in personnel to keep the allocation at the target percentage rate.
The Revenue by Person approach is a determination of how much revenue per employee per month the company needs to achieve in order to hit the desired earnings target. As revenue rises or falls, adjustments in personnel can be made accordingly. I used this regularly at an online marketing agency. When revenue grew, then we hired accordingly.
Advertising and MarketingSome standard advertising and marketing expenses include:
- Business cards and brochures
- Website and social media subscriptions
- Paid online advertising
- Conferences and trade shows
- Billboards, radio, magazines, television, newspapers, etc.
- Content creation such as e-books, white papers, presentations, webinars, free courses
- Professional organization fees
Certain expenses, like a website, are essential; however, others are optional. Perhaps you can limit your membership in professional organizations if those expenses are creeping up. Perhaps you can calculate the return on investment to particular advertising expenditures to determine if you want to continue with that program.
Training & Development
Training and development is essential for your employees to stay competitive. It’s often stated that we should spend 3% to 5% of revenue on training and development. Applying what we learn can result in benefits many times our investment. Some ideas for training could be podcasts, books, online courses, conferences, classes, and business coaching.
To save in this area consider instead of paying for the entire department to attend a particular seminar, consider sending one employee, and have them give a presentation to the rest of the group on what they learned. Businesses can save a lot of money by limiting the amount of people they send to any particular event.
Travel expenses include airfare, hotel, meals, entertainment, taxis, mileage, parking, and even toll roads. Plan the trips in advance, and limit the number of employees per trip. Advance planning can often provide discounted travel expenses.
The company should have a clear travel and expense policy to define what will and will not be reimbursed. Consider using expense reimbursement software such as Expensify to help streamline the expense reporting, approval, and reimbursement process.
Equipment, Office, and Facilities
Rent, utilities, and maintenance expenses can be a significant cost. These bills can fluctuate as you add staff and equipment. Supply and vehicle expenses such as fuel, repairs, and maintenance can fluctuate with production as well as the age of the items. Always consider a purchase versus lease analysis on any large-expense items.
Optimal Operating Margin
This list represents the major expenses of any company. You want to control your expenditures so that your profit is reaching its full potential. Ideally, a company should strive for an operating margin of 20% or more. A 20-30% operating margin will allow any business to be flexible and nimble and thrive in a changing economy. Expense management is a key component to profitability.
Need to get your company’s expenses under control? Ready to have your expenses managed to help grow your business? Contact Bender CFO Services today to get started.