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Business Survival 101: Cut Expenses

"Profits are the reward of doing a better job" D. Blakely


If your business is short on cash, losing money, and you are struggling to keep the doors open, here are your options: a reduction in expenses, an ultra-conservative approach to your cash flow and a determination to boost sales, or close the doors. Your immediate goal must be survival. The first step in doing so is to reduce expenses. And it is difficult compared to the excitement of expanding. It is like the medieval practice of bloodletting – painful, but considered at that time to be vital to the patient's survival. No business survives on sales volume. Get profitable and your problems will go away.


If you are determined to save your business, spend a few minutes on- line at any of the major investment websites viewing a few high-tech company financial statements. You will get an eyeful about "staying in business," reading the income statements of countless questionable companies with rapidly growing sales volume – but losing money. And, it seems that the more they grow, the more they lose. For example, I think you will agree that a 100 percent increase in sales with a 150 percent increase in expenses is "poor" management. An astute businessperson would ask: " What benefit is more business if it increases your losses? " A paper route would have been more profitable. Had these firms prevented expenses from outpacing sales the profits would have rolled in.


Getting back to your situation, be realistic. If you look for the miraculous "big cut" you probably will not find it. Instead, think of every dollar you can reduce in expenses as a new dollar in cash flow and the profit on sales of ten times that amount. Look everywhere for savings. Question every type of expense. Do you need all the cellular telephones? Do you need the company season tickets to the local stadium? Do you need the 800 numbers? Are all the ads and giveaways necessary? Nothing should be off limits or thought to be unchangeable. Pension plans, health plans, credit cards, even magazine subscriptions, should be on the list – nothing must be sacred. And don't place limits on your efforts; ask everyone for help. Ask for a reduction in rent. Ask your employees to take a pay cut. Ask anyone you owe or pay money to – it is in his or her best interest that you survive. Do not spend a dollar you do not have to. Do not fall for the argument, it is just a few dollars and will not matter. To use a trite expression: "They all add up." How much do you have to cut back? Enough to get rid of your losses. Most likely, the toughest part of the paring process will be letting employees go. In your haste to expand, you may have hired too many people. Now you must consolidate positions, eliminating all marginal and unnecessary tasks.


Think about it this way, if you aim for a 10 percent net profit, it requires $300,000 in sales to support a $30,000 employee. Every expense you have must be put to the test of, "Do I need it to stay in business?" You start your trip to saving your life's dream by reviewing your past three months of expenses from pay roll to paperclips and squeezing the excess out of all. Look at your losses for the last three months and determine how much you would have had to cut expenses to break even without an increase in sales volume. Hopefully, you can find enough "fat" to do so. Your miserliness must be unrelenting. Success will require sacrifice and discipline, and if you are not prepared to do so – quit now.


I find it interesting that one of the touted business models of the dot.com era, Amazon.com, just announced its first dollar of profit. Unbelievable! The company lost $3 billion from day one and is now hailed by some as a success. I suggest you not follow Amazon as a role model if your business is going to finance your children's education and your vacation home. You need profits, not public relations justifying your losses. Remember, this is a three-step process to survival: cut expenses, hold on to your cash and increase sales.
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Article © Copyright 2002 Dr. Paul E. Adams. Syndicated by Paradigm News, Inc.