Controlling your expenses is a key factor in having a strong bottom line. To do that you have to have an understanding of the true cost of the supplies you use, and how those costs influence your business’s prosperity.
Most people recognize there are many costs involved in keeping a business going, yet there are many small expenses, or, perhaps, unnecessary ones that have a much bigger impact on your business than you know. What needs to be considered is the amount of sales it actually takes to generate enough income to support the expense.
Every expense needs a generation of revenue to pay for it, no matter how big or small. That revenue, because it is a direct expense to your business, comes out of your profit margin.
Let’s say we have a shipping business that operates at a 5% bottom line profit margin. The business requires a black marker to label outbound packages, and they must replace one lost marker each week. Each marker costs $1.97. Most people would say that it costs the company $102.44 a year in markers, and consider that a fair expense. Yet in order to break even on that amount, the company must generate far more in sales just to make it back to zero.
In order to calculate the actual cost to the company to replace one marker, you simply divide the cost of the marker by the bottom line profit margin to get the sales necessary to replace it.
$1.97/ 5% = $39.40
The company will have to generate an extra $39.40 each week to break even on every marker replaced. That actually costs the business $2048.80 over the course of a year.
Rather eye opening, isn’t it?
Take a good look at your controllable operational costs. Where are you spending money needlessly? And what little shifts can you make to increase your bottom line profit?