Costs
Reduction
Increasing profits through cost
reduction must be based on the concept of an organized, planned program.
Unless adequate records are maintained through a proper accounting system,
there can be no basis for ascertaining and analyzing costs.
Cost reduction is not simply attempting to slash any and all expenses
unmethodically. The owner-manager must understand the nature of expenses
and how expenses inter-relate with sales, inventories, cost of goods sold,
gross profits, and net profits.
Cost reduction does not mean only the reduction of specific expenses.
You can achieve greater profits through more efficient use of the expense
dollar. Some of the ways you do this are by increasing the average sale
per customer, by effectively using display space and thereby increasing
sales volume per square foot, by getting a larger return for your
advertising and sales promotion dollar, and by improving your internal
methods and procedures.
Profit is in danger when good merchandising and cost control do not go
hand in hand. A big sales volume does not necessarily mean a big profit,
as one retailer, Carl Jones, learned.
Jones's pride was stocking stylish and well assorted lines of
merchandise. Each year, sales volume increased. This increase was
attributed to good merchandise which Jones felt took care of the steady
rise in expenses.
But Mr. Jones began to have doubts when he found it necessary to get
bank loans more often than had been his practice. When he discussed the
problem with his banker, Jones was advised to check expenses. As the
banker said, "A large and increasing sales volume often creates the
appearance of prosperity while behind-the-scene expenses are eating up the
profit."
Paying the Right Price
Your goal should be to pay the right price for prosperity. Determining
that price for your operation goes beyond knowing what your expenses are.
Reducing expenses to increase profit requires you to obtain the most
efficient use of the expense dollar.
Look, for example, at the payroll expense. Salesclerks are paid to sell
goods, and their productivity is the key to reducing the payroll cost.
If you train a salesclerk to make multiple sales at higher unit prices,
you increase productivity and your profits without adding dollars to your
payroll expenses. Or, if four salesclerks can be trained to sell the
amount previously sold by seven, the payroll can be cut by three persons.
An understanding of the worth of each expense item comes from
experience and an analysis of records. Adequate records tell what has
happened. Their analysis provide facts which can help you set realistic
goals, you are paying the right price for your store's prosperity.
Analyze Your Expenses
Sometimes you cannot cut an increase item. But you can get more from it
and thus increase your profits. In analyzing your expenses, you should use
percentages rather than actual dollar amounts.
For example, if you increase sales and keep the dollar amount of an
expense the same, you have decreased that expense as a percentage of
sales. When you decrease your cost percentage, you increase your
percentage of profit.
On the other hand, if your sales volume remains the same, you can
increase the percentage of profit by reducing a specific item of expense.
Your goal, of course, is to do both: to decrease specific expenses and
increase their productive worth at the same time.
Before you can determine whether cutting expenses will increase
profits, you need information about your operation. This information can
be obtained only if you have an adequate recordkeeping system. Such
records will provide the figures to prepare a profit and loss statement
(preferably monthly for most retail businesses), a budget, break-even
calculations, and evaluations of your operating ratios compared with those
of similar types of business.
Break-even
A useful method for making expense comparisons is break-even analysis.
Break-even is the point at which gross profit equals expenses. In a
business year, it is the time at which your sales volume has become
sufficient to enable your over-all operation to start showing a profit.
Once your sales volume reached the break-even point, your fixed
expenses are covered. Beyond the break-even point, every dollar of sales
should earn you an equivalent additional profit percentage.
It is important to remember that once sales pass the break-even point,
the fixed expenses percentage goes down as the sales volume goes up. Also
the operating profit percentage increases at the same rate as the
percentage rate for fixed expenses decreases - provided, of course, that
variable expenses are kept in line.
Locating Reducible Expenses
Your profit and loss (or income) statement provides a summary of
expense information and is the focal point in locating expenses that can
be cut. Therefore, the information should be as current as possible. As a
report of what has already been spent, a P and L statement alerts you to
expense items that bear watching in the present business period. If you
get a P and L statement only at the end of the year, you should consider
having one prepared more often. At the end of each quarter might be often
enough for some firms. Ideally, you can get the most recent information
from a monthly P and L.
Regardless of the frequency, for the most information two P and L
statements should be prepared. One statement should report the sales,
expenses, profits and/or loss of your operations cumulatively for the
current business year to date. The other should report on the same items
for the last complete month or quarter. Each of the statements should also
carry the following information:
(1) this year's figures and each item as a percentage of sales.
(2) last year's figures and the percentages.
(3) the difference between last year and this year - over or under.
(4) budgeted figures and the respective percentages.
(5) the difference between this year and the budgeted figures - over
and under.
(6) average percentages for your line of business (industry operating
ratio) when available, and
(7) the difference between your annual percentages and the industry
ratios - under or over.
This information allows you to locate expense variation in three ways:
(1) by comparing this year to last year, (2) by comparing expenses to your
own budgeted figures, and (3) by comparing your percentages to the
operating ratios for your line of business. The important basis for
comparison is the percentage figure. It represents a common denominator
for all three methods. When you have indicated the percentage variations,
you should then study the dollar amounts to determine what line of
operative action is needed.
Because your cost cutting will come largely form variable expenses, you
should make sure that they are flagged on your P and L statements.
Variable expenses are those which fluctuate with the increase or decrease
of sales volume. Some of them are: advertising, delivery, wrapping
supplies, sales salaries, commissions, and payroll taxes. Fixed expenses
are those which stay the same regardless of sales volume. Among them are:
your salary, salaries for permanent non-selling employees (for example,
the bookkeeper), depreciation, rent, and utilities.
Taking Action
When you have located a problem expense area, the next step obviously
is to reduce that cost so as to increase your profit. A key to the
effectiveness of your cost-cutting action is the worth of the various
expenditures. As long as you know the worth of your expenditures, you can
profit by making small improvements in expenses. Keep an open eye and an
open mind. It is better to do a spot analysis once a month than to wait
several months and then do a detailed study. Take action as soon as
possible. You can refine your cost-cutting action as you go along.
Food For Thought
People generally live up to
your expectations of them. If you assume that they'll cheat you and
expect them to take advantage of you, they probably will. If you
expect the very best from them, that's often what you'll get.
It works the same way, to an even greater degree, with your
expectations of yourself. When you expect the best from yourself,
you'll get it. Expectations play a key role in the way you see things.
When you expect the best, you'll see opportunity in situations where
others will see only problems. You'll have the confidence of knowing
that you will never settle for less than the best.
And when you expect the best of yourself, you'll inspire others to do
their best as well.
Expect to succeed in every situation. Never settle for less than the
best from yourself. And do others a favor by expecting the best of
them. What you expect will come to pass.
There are two kinds of people in the world: people who live life on
purpose and people who seem to have no purpose. Purpose is what will
keep you going when all else fails. It is necessary to have goals, a a
purpose is what enables you to reach your goals.
Your purpose is your vision. It is a goal that's bigger than you are.
It is the basis for your motivation.
How do you find your purpose? Start with things you value. Don't be
critical, just think of the first things that come to mind. Say you
value money. That's a fairly common answer. OK, now ask yourself this.
Why do you value money? What do you want it for? What will the money
bring you? Let's say your answer is "a new car." Then ask yourself
what the new car will bring you. The answer could be, depending on the
car, "prestige" or "dependable transportation." So ask yourself what
that would bring you.
Eventually, if you follow this line of reasoning seriously and
thoughtfully, you will arrive at your very basic values and your
purpose in life. All of your desires stem from your deep-down,
fundamental values and purpose. And the way to discover and understand
them is simply to work backwards until they are revealed.
Knowing your purpose will help you to stay motivated and focused on
all of life's wonderful possibilities.
I recently saw a brain researcher discussing early learning in
children, and what steps parents could take to help their children
become more intelligent.
His most emphatic suggestion was: sensory stimulation. He even
recommended exposing children to movement and music while they are
still in the womb. Stimulation of the senses creates electrical
activity in the brain, and this accelerates the formation of pathways
between the brain cells. These pathways, called dendrites, are the
basis for intelligence. The more, the better. We're born with a fixed
number of brain cells, but there's no limit to the number of
connecting pathways that can be created. |
