I owe my parents sincere thanks for instilling in me the value of money and the benefits of not living beyond my means. And while they would cringe at the amounts I have invested in my children’s “education”, those “large” sums will come back in spades in both short and long term. If you are asking whether or not I am looking for a return on that investment the answer is absolutely!
And yes I do measure how I spend money, even when it’s for my children, just as I do with the businesses I advise, whether I am an owner or an advisor. Ultimately every business must get their arms around costs, and the need to reduce them, if they are to drive the bottom line up and reach their net operating income and return on investment goals.
Reducing Costs
Most of us that have served the traditional role of “provider” for the family recognize just how difficult it is to cut back on the home front especially once certain habits have been established and you have a spouse that has no inclination to cut back in anyway, shape or form. Well in the management of a business, the attempt to reduce costs is met with about as much enthusiasm BUT the pain of the effort is well worth the pleasure derived.
Increase Sales or Reduce Costs; which is more Profitable?
Reducing costs can be far more profitable than increasing sales. If the company sells a product with a 20% profit margin after all costs – product cost, salaries, overhead, etc. – $1,000 in sales (minus $800 in costs) produces a $200 profit. A 10% increase in sales increases profit by $20. But a 10% reduction in costs saves $80, which is four times as much. Thus a reduction in costs of only 2.5% will produce as much profit as a 10% increase in sales. The smaller the margin on sales, the more dramatic the impact of cutting costs. With a 10% profit margin, a 10% cut in costs produces nine times as much profit as a 10% increase in sales.
So while it may be true that “(sales) volume cures a lot of ills” it should be crystal clear that a focus on cost cutting will do more to drive the bottom line than most are probably aware of. Thank goodness for Mom and Dad and their well placed knowledge.
This article was written by Gary Field, CPA at Numerico, PC. Click here to view Numerico’s website.
