Are your overheads taking priority over your profit?

Now that you are putting your Profit First (as outlined in my previous blog). The next challenge is to move your business into a cash generating machine. One way to do this is to really understand your overheads. Are your overheads taking priority over your profit (and most importantly your wages)? Understanding this will help you to make the right decisions and it’s simple to do. Mike Michalowicz outlined the process in his Profit First book…

You need to categorise your overheads as either:

  • P for any expenses that directly generates (P)rofit
  • R for any expenses that, while necessary, can be (R)eplaced with a less expensive alternative, and
  • U for any expense that is (U)necessary for delivering your offering

Then, go through the previous years accounts, credit card statements and loan statements and on a spreadsheet start allocating overheads to each category. Once you have done this, you need to make yourself accountable and, I advise, to work with your accountant to understand what costs are necessary.

Once you have allocated your overheads and resources, you can begin to look at costs that can be reduced. Start by cutting the U expenses, then find ways to reduce the R expenses – with replacements or alternatives – and then evaluate the P expenses to see if you can structure the expense more favourably.

The important part is to start with really small % reductions as you cannot jeopardise the running of your business and create uncertainty within your workplace. The secret is to have a goal that you want to achieve within a certain time period.

Another cost cutting strategy is to, before investing or spending money, to sit back and assess if the cost is necessary. Ask yourself  whether you can get away without buying that item, if you can, then it’s obvious the business doesn’t need to spend that money and you have more funds to put in your Profit bank account.

“Wesley Rocha didn’t take a raise in 10 years. The founder of LinkUSystems watched his company grow and his own income remain stagnant. “I don’t understand why it seemed like even though we would make more money, we never had any left over. I felt stressed about finances all the time.” Wesley finished reading Profit First in a weekend and realized quickly that his expenses were way out of control. “I couldn’t immediately implement cutting costs without grossly damaging projects or the business. I literally needed all  of my employees and 90% of everything we had been paying for because we were stuck and committed to it.” Little by little Wesley started chipping away at his expenses. “over the past year unfortunately I have had to release 6 employees but have been able to replace their efforts by eliminating unprofitable products and services, re-creating and optimizing processes and streamlining other portions of the business. Now, I’m able to determine what expense is allowed for a project before we take it on. Otherwise, we have to figure out another solution.”

Figure out another solution. Music to my ears. Not, “We have to find more money to cover it.” Time to crack the knuckles and find another way.

In the first year of implementing Profit First, Wesley was able to double his profits, which allowed him to increase his annual income by approximately 46%.

You can take it slow. Just get started.

Profit First gets you to think differently about spending money on your overheads and there is obviously going to be times when you do need to replace that old PC, but I bet you’ll do some research and compare prices now, rather than just going ahead and purchasing it.

Finally this paragraph from the book sums this cost cutting exercise in a nut shell:

“The new definition of success is not about the most revenue, employees and office space but the most profit, generated through the fewest employees and with the least expensive office space. Make the game of winning based upon efficiency, frugality and innovation, not on size, flair and looks.”

To discuss ways of extracting more profit from your business and advice on reducing your overheads contact lee.manning@raffingers.co.uk. You can also follow him on LinkedIn.