13 Practical Ways to Cut Down Your Business Expenses

In a business, the cost of your goods sold significantly affects your profit margin, and how much you would be able to re-inject into your business after incurring other operating expenses.

Understanding this as a business owner increases your ability to maximize profitability for your business.

In accounting, there are two levels of profitability namely gross profit and net profit.

Gross profit is revenue less the cost of sales or the cost of production depending on if you actually produce the items or buy and re-sell. 

Simply put if you purchase 10 cartons of juice for #48k and sell for #80k, your gross profit would be #80k less #48k which is #32k.

To add meaning to these figures, you should go further by computing your gross margin which is a metric to measure your percentage of profitability; it compares your gross profit as a percentage of your sales. 

Using the same scenario above, your gross margin in this case becomes 32k divided by your revenue of 80k (32/80) which results in 0.4 or 40% when you multiply by 100 to quantify the result as a percentage.

This metric indicates that your cost of producing/selling that item is 60% of your revenue leaving just 40% to cater for your other business expenses and the leftover as your final profit (Net profit). 

What you should know is that your gross profit isn’t your actual profit        

why because, you still need to make an account of expenses you incurred to keep the business running such as marketing costs, salary, fueling, and rent, among others.

Using the same example above, assuming it's an online business you run from the comfort of your home and you incurred an additional 5k only on marketing, and 10k for packaging bags, you can derive your Net profit by deducting this 15k expenses from the #32k gross profit you realized leaving you with a final / Net profit of #17k.

How much sales you make, and most significantly the cost you incur to make that sales largely affects your profitability. To increase this as a business owner, your aim should be to minimize costs without tampering with the quality of your product or service. 

By reducing your cost, your gross profit increases making improving your ability to cover your other expenses. How much gross profit you make significantly affects your capacity to pay rent when due, to pay yourself and your staff, and to pay for other operating costs necessary to run the business. 

A high gross margin also determines how much net profit you will be left with at the end of the day. 

You can reduce your cost of production by a combination of the strategies below: 

• Through economies of scale – which involves making purchases in larges quantities so as to take advantage of bulk discounts. 
• Build long-term relationships with vendors so as to get quality goods at affordable prices and to benefit from customer loyalty programs.
• Strive toward re-negotiating with suppliers to get better deals and a good way around this is by not heavily relying on a sole vendor. 
• Actively find ways to reduce suppliers’ bargaining power – Where necessary, stockpile essential goods in anticipation of rising prices.
• Buying quality materials/ items will reduce wastage and re-work.

Why bother about reducing costs?        

A lower cost of production increases your ability to offer reasonable prices to your customer and is a must-do if you want to opt for a low-cost business strategy.

After maximizing your gross profit, another critical factor that can impair your overall profitability is your business operating expenses.

I bet you will agree that it is not uncommon to see businesses make substantial revenue, with very little new profit at the end of the day. This is mostly because the operating expenses eroded almost everything.

Consequently, in the long run, the business may longer be profitable and hence unsustainable.

To prevent the aforementioned, you need to manage and reduce your operating expenses.

• Your operating expenses to a large extent are controllable but to achieve this, it is advisable to work with a budget. Having a budget shows you the volume of sales you need to make to be able to meet your operating expenses such as rent.
• Secondly, Invest adequately in your human resource (team) so they can give you a higher-than-expected return – in terms of productivity and value-added.
• Determine what functions to outsource and which to do in-house and pick the solution that provides the most value at a cheaper rate.
• You might want to consider a hybrid work culture so as to reduce office space and running costs or even lease out idle space to generate rental income. 
• If applicable, file your tax returns early to avoid penalties.
• Embrace technology by automating some of your working processes to improve efficiency and save costs in the long run.
• Consider reliable energy solutions that would provide lasting significant benefits and reduce fuel costs in the long run.
• Effectively manage your debtors to reduce bad debt.

It is up to you to critically examine your business and figure out areas where you can save costs. Because ultimately, profitability is important to sustain and grow your business.

We will be looking into improving profitability through sales in a subsequent article so do stay tuned.

Knowing this information is very crucial if you want to increase your business profitability. But implementing it is what works better.

From

Your Fav-Accountant -Here to ensure you achieve your business goals.