Is Expense Drift Killing Your Profitability?
When is the last time you took a look at EVERY expense associated with running your business? A week? A month? A year?
If it's been over 3 months, it's time to dig in and take a look.
Because of a common occurrence I call "expense drift".
These tend to be smaller monthly expenses that are easy to overlook or ignore. It's easier to focus on the big expense items; rent, payroll, utilities. After are those are core to running our business.
Where "expense drift" comes in is with the smaller items it's easy to overlook or think don't really matter. Usually these things are on auto-payment. We just get used to seeing them on our statement every month, but never take the time to figure out how much they are really costing us. An easy example might be a magazine subscription no one reads anymore, or a membership to an online forum you haven't visited in 2 years. One example from a client out in Michigan was their towel service. They got a great deal when they signed up, only to realize over the last couple of years they were paying triple!
You'll also want to take a look at things like merchant account fees, and insurances. These things can and should be negotiated. As your business grows and you establish better credit, give your merchant services provider a call and see what they will do. It could save you hundreds or even thousands every year.
I coach our clients to perform an expense audit every quarter, and provide the recording tools as part of the Fit For Profit OS. The first time through can take awhile, but once we establish a quarterly rhythm it only takes a short time to keep up on it.
Here's what to do:
Write down the product or service, how often you get billed for it, and the cost, then categorize the expense in one of 4 ways:
- P = expense that directly generates profit
- R = necessary expense, but could be replaced with a less expensive alternative
- D = desirable (e.g. we want it) but not necessary for delivering our core offering(s)
- U = unnecessary for delivering our core offering(s)
Eliminate all your "U's" and replace all your "R's" with less expensive alternatives.
Thinking it's not worth the hassle?
Let's say you do this and save $1000 this quarter. If your Profit Margin is 15%, you would have had to sell over $6500 in additional products and/or services over that time to come out ahead. For some reading this that might be easy, but for others not so much. Regardless, your business will become instantly more profitable by taking action and getting your expense audit done.
Stop your expense drift starting today. Your profits will be glad you did.