Another year is over and a new one begins, along with resolutions for improving the things that make your business more profitable and less stressful. Finding potential improvements requires investigation, but you don’t need the skills of Sherlock Holmes. The clues are in plain sight on your financial statements.
First, you’ll need your financial statements for two years – the one recently ended and the prior year. With this information you’ll be able to do a simple comparison analysis to discover which categories increased and which declined.
Don’t just look at the bottom line on the income statement and decide you don’t need to do anything if profits increased. You won’t continue to remain profitable by doing nothing, so find out what components contributed to profits – or losses.
Your income statement should compare both years on a single report and show percentages of change from one year to the next. You may end up with several pages taped together and draped over a conference table, but that’s the easiest way of spotting the variances between the two years. Otherwise, you’ll have to manually enter the figures on a spreadsheet to compare.
What you’re looking for
Increasing revenue is the easiest identifiable source of greater profitability. Determine the year-to-year percentage change in revenue. Then compare that percentage to the rate of change in profit. Rising revenue should cause profit to increase at a higher rate. This happens because most expenses are fixed; they don’t increase along with revenue. Thus, more of each incoming dollar goes straight to the bottom line.
Some business costs do fluctuate with revenue. For instance, the cost of goods sold will typically change with sales.
Actions to take
Suppliers want your company to prosper and remain their customer. Based on the information gleaned from your financial statements, ask your top providers for discounts.
Suppliers often give discounts for early payment. Take advantage of this when rising revenue makes you flush with cash. If revenue is declining, you need supplier help to improve cash flow. Request extended payment terms, even if you’re required to pay a little more. As conditions improve, go back to paying early.
When revenue is pouring in, you’re often tempted to spend on extras. If your profit didn’t grow as much as expected, look to your operational expenses to find that leaking cash.
How to reduce expenses
You don’t have much leverage with routine expenses such as rent, utilities and equipment maintenance contracts. But you can negotiate new arrangements when the old ones expire.
Advertising and travel expenses are always ripe for adjustment. Finding new providers of phone service and IT support are also money-saving opportunities. And always search for lower bank fees and merchant credit card fees.
Reducing expenses does more than raise profit and give you a feeling of security. The extra cash offers you the flexibility to invest in new technology as well as expand your offerings or reach new markets. Greater opportunities await business owners who learn to maximize cost efficiency.