As a time goes by, normal expenses for a business tend to “creep up” and begin to erode a portion of profits. Has this happened to you and your business?
3 simple steps to improve the profitability of your business:
1. Identify general ledger expenses as one of the following:
- Discretionary. These are expenses that could be eliminated and it would not directly affect the operations of the business.
- Examples – Entertainment/tickets, sponsorships and 401(k) match.
- Controllable. These are expenses monitored by management and can be controlled to increase profitability.
- Examples – Supplies, office related expenses and labor.
Management of these expenses is an important area to examine for expense creep.
- Non-controllable Expenses. All remaining expenses should be classified in this bucket. They are not discretionary and cannot be controlled by management.
2. Now that you have properly identified expenses, we recommend examining each of the discretionary expenses and determining if the incurrence is adding value to the business. If not, consider either eliminating or reducing the expense amount moving forward.
3. Finally, you should review each of the controllable expenses. Identify what is the appropriate amount or percentage each expense should maintain. We recommend creating a system to monitor and report expenses and compare them to the pre-determined goal.
“What gets measured gets managed, and what gets managed gets improved.”
This simple exercise is a very effective way for your business to better manage expenses and reduce the effect of expense creep. If you would like assistance implementing a program such as this, please contact a Smith Schafer professional.