were hit with an unusually slow holiday season. Small businesses were even more affected, as consumers headed to discount stores over “mom and pop” locations. This surprise hit many businesses unexpectedly, greatly reducing their 2007 earnings.
Instead of counting on the best or even an average month, begin to look at your worst month for an indication of how much money your business can make. Using lower than usual net revenue will make your budget estimates much more predictable during difficult financial situations. Even during slow seasons, difficult economic conditions, and unusual market turns, this net revenue amount will represent the approximate amount of income your business can generate. Ideally, all of your expenses should then be reduced to less than this figure. This will create a predictable budget that will allow your business to become profitable as quickly as possible. Instead of losing money during difficult times, your business will be able to sustain itself and focus on growth, not on fighting a losing battle against the mounting debts.
2. Required Expenses versus Desired Expenses
In order to make the best reduction choices for your company you must commit to clearly identifying costs that are required versus the costs that are desired.
Required business expenses are those expenses that your business cannot survive without. This will be a very short, specific list that includes only those bills that must be paid for your company to remain open. For instance, every business must have the appropriate licenses, and the cost to get licensed can range from the trivial to the exorbitant. The licenses are a good example of critical bills. If you failed to pay them, you would be out of business. This list should not include luxuries that you would like to have to stay in business (e.g., break room coffee service would not be included in this list). Your company can still do business even if it doesn’t serve employees free coffee. Therefore, this list should represent only those items that you must have to survive.
There are also items that may be required for one business and only desired for another. Items such as rent, utilities, and licensing fees are required for any small store in a strip mall. Without these items, the store couldn’t exist. However, if you are working in a consulting business and rarely use an office or you work at home, “rent” may not be on your list, even if you currently have a lease for your business. This list is meant to represent your company’s list of only those items that cannot be sacrificed or eliminated.
Now that you understand what to include, go through each bill and determine if each is required or desired. Expenses may include rent; utilities such as water, electricity, and sanitation; insurance; state fees; licenses; phone; Internet; loans; bank fees; and credit card fees. After you total all of these required items, you will have your business’s minimum expense list to stay in business. Now compare that number with your lowest net revenue for the last 12 months. If, in your worst month, your revenue isn’t higher than the total of your minimum expenses, review your bills again to determine if any expenses can be removed from the required list. Look hard, and remember, nothing is permanent. Anything you drop now can always be added back later. You want to make money now, not in two years, so cut deep!
3. Negotiate and Reduce Your Bills
Obviously, since this list represents required business expenses, you cannot reduce your expenses in this area by simply eliminating any of these bills. However, these costs should still be reduced as much as possible so that they represent the minimum spending required on these expenses. Even if you have a contract, signed lease, or recently purchased service, there may still be opportunity to reduce your cost.
First, review each bill on the list and each item on the bill. Just because these bills appear to be required, doesn’t mean there aren’t any extraneous expenses. For instance, check your local phone bill. Are there any services on the bill that you don’t need or use? Are there any items that can be dropped? If you aren’t using call-forwarding or three-way calling, why are you paying for it? Are employees taking advantage of your company and using your phones for personal long distance? Are you paying late fees or penalties? By reducing unnecessary line items on your bills, you can ensure that your overhead contains only necessary costs.
Once you are sure that the bills are correct and the excessive costs are reduced, you may still have the opportunity to reduce your bills further. By researching your options and then negotiating new rates or plans you may be able to lower your costs even more.
Lifesaver: Voice Over IP (VOIP) is one way to get phone service at a much cheaper rate. By running your phone calls over the Internet, providers are able to offer long-distance phone service for much lower rates. In some areas, unlimited long distance can be bundled with your Internet service for as little as $15 per month. This discount can add up to significant savings throughout the year!
Next, for each of the bills on your list, contact any competing vendors. If you do not know any competing vendors, simply go online or check your local phone book. When you call, let the company know you are thinking about switching vendors. Most likely, these competitors will have salespeople available who can help you understand your current bill and your options. In order to ensure that you have the right view of the industry, make sure to get the advice of more than one company. After you have researched competing vendors you will know which provider offers the lowest prices.
If you have found a lower cost provider, make sure to call your original company before you switch. Some companies are competitive and may offer you new enticements to stay. If you haven’t found a less expensive option, you may still have some negotiating power with your current vendor. Some business owners find that they have more options after owning a business for a few years than they did when they first started the business. Talk with the sales representatives for each bill and let them know you are shopping around. Sometimes, just bringing this to their attention may make them offer you discounts and services that could be valuable for your company.
Of course, some industries will naturally have more flexibility than others. While your utilities (i.e., water, garbage, and electricity) may not have many competitors, they may have competing packages to review. Other industries, such as insurance, may be very flexible. Insurance, which is often very expensive for a start-up business, may actually decrease as your business continues to have a clean record. Also, the cost of a policy with a higher deductible may be much less expensive than one with a lower deductible.
However, when incidents do occur, you will have to weigh the cost of making a claim and getting some of the money back against not making a claim and paying the costs yourself. Some companies use their insurance regularly to offset the costs of petty theft, vandalism, and damaged goods. While this may resolve the immediate problem, this may not always be financially responsible. Very often, insurance companies will raise your premiums if your company reports too many losses. Unfortunately, one small computer store we know of made four claims in one year. Theft of a laptop, accidental damage to a customer computer, customer file corruption, and a small accident on their property were all settled using their insurance. Although each claim was settled quickly and easily, using insurance that frequently eventually led the insurance company to raise the company’s premiums dramatically. Eventually, the owner closed the business as he claimed the insurance costs alone were making his business unprofitable.
Note that we’re not saying that insurance should be eliminated due to the expense. Insurance is an absolute necessity for any small business and cannot be purchased when you need it most (e.g., just after an accident). While you should review your insurance costs your business should not eliminate it.
Lifesaver:
