“Lean” Your Expenses
Reason #21 for Implementing Profit First in 2024 - “Lean” Your Expenses
At Beyond Your Books, we often hear about rising costs, uncertain economic trends and diminishing profitability. In these “unprecedented” times (a phrase coined and overused during the pandemic) - small business owners have been riding a roller coaster of good times and bad repeatedly. We are here to support you – the everyday small business owner – in staying on top of your financials by feeling confident with up-to-date information. It is the gold standard we have come to expect.
We happen to love this feature the most about the Profit First method and the process of implementation – the opportunity to do an Expense Audit and help business owners “lean” down on what is actually important and necessary at this stage.
Going “lean” or reducing expenses doesn’t mean cutting corners, going cheap or reducing your quality reputation. It means getting strategic and intentional about where your money goes – so you can build a sustainable foundation for your finances.
Why Going Lean Matters
The two ways to improve profitability is to reduce expenses or increase your revenue. The latter isn’t always so easy to do – raising prices can create backlash, finding new customers often comes at a cost and creating more work for yourself or your company isn’t the most efficient way to improve the bottom line.
Auditing your expenses with a Certified Profit First Professional, especially one with experience across different sectors and industries, can help with assessing standards, average costs, spark new ideas and even find alternatives or creative ways to enter your next season.
Going Lean can provide you with flexibility – to save more for a rainy day, grow a bigger team, or invision expansion. If your overhead operatings expenses are dauntingly high, your business model is unsustainable and at risk.
How Profit First Helps “Go Lean”
By allocating every dollar of your revenue into different bank accounts for specific purposes, business owners are not tempted to make decisions on “inflated” bank balances that are not truly meant to be spent. For example, by moving over funds you are saving for taxes, you aren’t tempted to spend too much money on something new (and shiny, of course), and be left panicked and scrambling when the tax bill comes in. Some of us small business owners tend to self-sacrifice (under pay themselves), while others have no problem taking a cut (over pay themselves), and again, the business is drained too thin to continue to operate.
Profit First offers set guidelines on how to allocate your cash to plan for these vital needs – making a profit, paying the owner, saving for taxes and THEN taking on operating expenses.
Here at Beyond Your Books, we do not recognize this:
Sales - Expenses = Profit
We see…
Sales - Profit = Expenses
Take your profit FIRST. Then pay those expenses. It forces you to get lean, creative and efficient with your resources when you prioritize profit!
As part of our client onboarding with Profit First implementation coaching, we will conduct a full custom Profit Assessment and Roll-Out Plan to match your current status with future goals. One vital exercise in this process is completing an Expense Audit.
But wait, the fun doesn’t stop there. We audit those expenses on a regular basis moving forward – usually quarterly, and definitely annually to see bigger picture trends. At the Quarterly Review, we can track upcoming expenses or unexpected ones; on an annual basis we can review to assess need for pricing changes, offer edits and opportunities for new lines of business.
Tips for Reducing Overhead
What is included? What is not necessary? Is that a want or a need?
Expense Audit Questions & Prompts
Highlight what expenses are Profit or Revenue generating (directly), what you can Replace or Reduce, and what is Unnecessary or can be paused temporarily
Audit recurring expenses first: it may surprise you to total up the sum of all those little charges on autopay!
Calculate base overhead: add together your baseline expenses - rent/mortgage, average utilities, insurance premiums, licensure and software operating expenses
Sum up your variable expenses: staff, marketing, advertising, repairs & maintenance, equipment/technology upgrades
Find alternatives to common costs
Optimize staff roles - delegate, uptrain, or outsource
Negotiate contracts, employee/contractor agreements
So how much “should” I be paying for ____________ (operating expense)?
It depends!
We help our clients walk back the true cost of taking on a new expense – adding a $100 subscription doesn’t mean will it help you make $100 more? With the Profit First model, we have to figure in your true profit margins and goals. That may mean 5x or 10x that expense – and being realistic with the revenue generation that will come along with that new cost.
If your new marketing firm wants $10,000 for adspend – what does that mean for the top line? You need to be able to measure the return on that investment. Hitting revenue goals and setting parameters for how long to experiment with such investments is really next level. It all starts with where you are now, opitmizing and realizing the vision moving forward!
Beyond Your Books remote bookkeeping and accounting firm can help you see into the future with Profit First Coaching.