Let's look at a simple scenario where a 15% cost reduction can lead to 60% + better profits.

Let's take a fictitious business:

This business generates $100,000 per month in revenue. It has a monthly gross margin of 50% or $50,000. It monthly overhead (salaries, rent, utilities, marketing, etc.) is 40% of its revenue or $40,000. The company pays $1,000 per month in interest expenses and has a 10% net tax rate. Under this scenario, this company would earn a net profit of $8,100 for the month.

Now let's say this company was able to reduce its overhead by 15% (from $40,000 to $34,000 - a $6,000 reduction). Keeping all else the same, this company's profits would spike to $13,500 for the month - a 67% increase.

How does a company cut its costs in this manner? Any way that it can. I suggest taking your income statement and looking at each and every expense - item by item.

When looking at these items, think: 'Are there costs that can be eliminated or reduced?' Now, I am not suggesting you cut costs related to your core business. But, there may be costs that are not core to your operations that can be reduced.

Look at your facility. Are you using all the space you have? Can you downside to a smaller building or space? Can you find a facility that includes utilities for the same rent that you are paying now? If you own, can you shut off unused space? Can you rent it out and share the costs of utilities? Can you refinance?

Look at your utilities. Can you open windows instead of running the A/C or heat? Can you turn them down - even just a few degrees - during non-business hours? Can you shut off vents to areas that are not used or little used? Can you replace light bulbs or use sensors that shut off the lights when no one is in a room?

Look at other office costs? When was the last time you shopped your phone service, your internet service, or your insurance? Can you use VoIP instead of traditional phone lines? Do you have a separate fax line that can be eliminated? Are you using costly shipping services that can be temporarily stopped or reduced by using another company?

Look at your supplies. Are there areas here that can be cut back? Buy cheaper office supplies; e.g. non-name brand paper, printer ink, paper clips, etc. Buy in bulk at discounted rates? Get discounts for paying cash or paying early.

Stay at home meetings. Can you use conference calls or remote meeting software to save travel, lodging, and meal expenses? Look at companies like WebEx.

 

Look at your marketing. I am not suggesting in any way that you cut your marketing. However, you can look at this expense item to determine if you are getting the best bang for your buck. Is your marketing targeted towards your most profitable customers? Is it targeted towards your most profitable products and services? Can you joint market with a neighboring business to sharing advertising costs? Are you looking to pick up customers from your competitors who have gone out of business?

Lastly, go to your suppliers or vendors. Ask for an immediate 15% to 20% price reduction. These businesses, also feeling the effects of our current economy, would rather, for the most part, keep you as a customer at a reduce price then to lose your business completely. If you don't ask or don't shop around, you will never see any benefit.

Remember, all the little things you can do will really add up in the long-run. Think about our fictitious business above, a small 15% cost reduction increased its monthly net income by 67%. Further, if this company's revenue were to fall during these hard times, it could fall by nearly 12% overall and still maintain its current net profits, provided it finds the 15% cost savings.

It is up to you!

Joseph Lizio holds a MBA in Finance and is founder and owner of http://www.businessmoneytoday.com - Also, visit his blog at http://businessmoneytoday.blogspot.com/ BusinessMoneyToday.com is a single portal in which business owners can easily find and obtain non-traditional financing for their business. Been turned down by your bank(s), then you have come to the right place. Search BusinessMoneyToday.com for Business Loans & Lines of Credit (secured or unsecured), Invoice (A/R) Factoring or Credit Card Cash Advances, Business Credit Cards, Commerical Mortgage Products, Equipment Purchasing and Leasing. Find money for payroll, inventory, working capital, or any business purpose. BusinessMoneyToday.com can help you find the money you need for your business even if you have less than perfect credit. YOU search for the products YOU need and select the lender or financial provider YOU want to work with. Remeber, BusinessMoneyToday.com only works with money providers who WANT TO WORK WITH YOU!