Making cuts to increase profitability

Overhead expenses are the costs that business incurs on a day-to-day basis. Overhead expenses are things like your utility bill, telephone bills, rent, taxes, and other operating expenses. Any business that is looking to increase profitability must assess their overhead expenses and make cuts.

Supermarkets are warehouses have adopted a low-energy saving method. They have started turning off some of their lights to reduce their utility bills. Others have switched to energy-saving lights that use 3/4th the amount of energy as a standard light bulb. Utility costs average around 10 percent of your businesses income. With small changes like reducing the temperature on the heater or increasing it on the air conditioner, your company can save an average of 5 percent off your regular heating and air conditioning bill.

Businesses are also spending too much money for phone service. Most businesses require at least 2-3 phone lines in order to properly run their company. Long distance charges alone are 3-4 times the normal rate of a local phone call. Since businesses often make several long-distance calls, this can add up quickly. Vonage and other VoIP providers are offering lower rates (starting around $20 a month) with all the same services. Businesses that are looking to cut costs will do themselves a favor to look into VoIP providers and other phone providers to compare rates.

Make a list of all your expenses and eliminate waste. Some areas that cause waste are human error like leaving the lights on in an empty room. Making personal phone calls from the office or keeping the entire office cooled when only one person is in it are some other standard "wastes".Creating a list of your expenses will allow you to analyze them and rank them in the order of importance. Then list how much you need to cut the expenses by. For example, if you have a list of all the marketing costs, make a note next to each cost as to how much you can reduce your marketing budget by, but still gain the publicity you need.

When companies make cuts, they often decrease their profitability. This is because most businesses do not look at the implications of the cut. For example, if you cut your marketing budget by $500 a month, you probably don't realize that this means your marketing team may need to hold off on your online advertising campaign. This campaign could be where most of your sales are coming from (pay-per-click ads). Decreasing some costs decreases your profitability and the whole point of saving money is for not. Creating a list of your costs is the only way to trace where each cost will impact the company and either increase or decrease profitability.

The best place to look for areas to cut costs is your profit and loss sheet. This is your income statement and it should provide a detailed listed of all the expenses you have at the company. You can go through each one individually, rank them, and then start cutting costs. Profit and loss sheets provide the most current information to business owners. Some businesses only generate a profit and loss sheet once a year, but you should do it quarterly or monthly if you need to cut costs. Compare your recent profit and loss sheet to previous years' profit and loss sheets to figure out the differences between the two and if your company has stayed on budget over the years. Some of the simplest costs to cut on your profit and loss sheet include the following:
Payroll expenses
Shipping
Inventory
Advertising and marketing
Utilities
Rent
Insurance