Throw people at a problem
- Not always a solution
- May need to correct operational process
Manage the salaries
- Use HR reports to match salaries paid to type of work performed
- Salary reports available – adjusted for the state or region
- Don’t give raise over cost of living if employee is at the highest amount unless responsibilities increase
Important to monitor as business grows,
one of the ways to make sure we control expenses is to manage our salaries. A
lot of times a business owner will give raises to employees because they’ve
been good employees. This is all well and good, but sometimes you end up with
an employee that’s getting paid significantly more than what their job
responsibility reflects. You can use salary surveys that are available for your
state or for your region to give you what a normal salary would be for, say, a
clerical position or manufacturing type of position. There are usually some
pretty good description so you can get an idea of what your employee’s salary
should be, or what your employee’s job function is in relation to the salaries.
Good idea to make sure that you know what a good salary is for a particular job
function. Employees typically respect that. Also at your salary is in your
business. You may had situations where overtime has gotten out of control
because the direct supervisor was not paying attention to the overtime as it
was creeping up and before you know you are paying a huge amount in overtime
where maybe you could have saved money by adding an employee versus paying
overtime.
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Managing your controls or
managing your people costs is such an important part of running a business. Also
the timing on when you give increases, you make sure you give employer reviews
on regular basis. Because it is a way of making sure that people understand
what they are getting paid and why they are getting paid whatever they are
getting paid. Now if you had an employee
that wanted an increase, I would let the employee know how they can get an
increase if it was not possible for them to get an increase in their particular
job. If they took on additional responsibilities or change their job
description, then they could get an additional amount of pay. Again, people
understand this. If you do more, you can get more. Usually, if an employee goes
from the job function to a managerial function, they would get an increase in
pay. Not everybody is willing to do this, but that is definitely something that
you can point to for an employee to aspire to get more pay.
Look for the largest
expense on the financial statement
- Maybe materials for the product
- May be support expense
- Depends on the industry and the product or service
- If materials, look for waste or suppliers with better pricing
- If support expense, what do others in the industry control expense
- Get information from your association
- Contact a indirect competitor
- Vendor can provide good information if you keep a good relationship with the vendor
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If you have materials as a large
expense on your financial statements, look for some waste in your manufacturing
process or look at your suppliers. Can you get suppliers that provide better
pricing? Have you shopped the suppliers most recently and found that you have a
supplier that’s reliable, that has better pricing? Make sure, of course, that
the supplier is reliable.
If you have a support expense,
then look to your industry and see what others in your industry do to control
those expenses, then look to your industry and see what others in your industry
do to control those expenses. Recommend partnering with your industry
association and a lot of times in industry will have several associations that
you can participate in to get information about what others in your industry
are doing to control expenses. It’s amazing what your competitors will provide
as far as information is concerned, just out with pride or ego. And we do not
know it, but you could always found that your competitors are willing to share
information and they can talk about some other of the ways that they control
expenses. Also your vendors, are amazing at providing information if you have a
good relationship with your vendors. All of these ways can help you look to the
top three expenses on your financial statements with ways to control those expenses, to manage those expenses, and
keep them as low as possible.
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Others way to control expenses
- Use industry reports for comparison
- Understand variances – Horizontal or Vertical
- Have company wide or division reward for expense reduction ideas
- Cost a little and may save a lot
- Use ratios
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Another way to control the
expenses is to look at industry reports so you can see what your competitors
are paying as a percentage for certain types of expenses. We do not want to
look at dollar amounts, but we would look it at a percentage that expense to
revenue to see what our competitors are paying. We also want to look at
comparing year to year. You can look at a number of different ratio
comparisons, vertical or horizontal. Vertical, you are comparing your expenses
to your revenues and so that’s considered vertical analysis. Horizontal
analysis, you are comparing your expenses to the previous month or the previous
year. Both of those methods are easy to do with most accounting software. You
can run reports like this what you look for is a percentage that changes
significantly, good or bad. Because you might see a percentage that changes in
a positive way, but something else going wrong. It’s not necessarily a good
thing that your percentages are improving unless you know why.
Using ratio is a good tool. Use
gross profit ratio by watching the trending for the percentage of gross profit.
As the revenues changed, put the revenue numbers and a month to month to month
grid the the gross profit percentage. The gross profit numbers may go up, but
the gross profit percentage may go down and if that is happening, we need to
investigate and figure out why it very quickly. This did this happen in
business and able to catch it pretty quickly and make some changes so that it
did not continue to happen for the rest of the year. Tracking profitabilities,
so important: monthly, quarterly and annually and tracking mean you would have
spreadsheet with key numbers on a spreadsheet, which would be revenue, gross
profit percentage, and net profit number and the net profit percentage so that
you could track and watch them increase or decrease depending upon how you were
growing your business.
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- Track profitability
- Monthly / quarterly / yearly
- Understand increase or decrease in gross profit
- Every year or two, get bids for insurance / suppliers / any large expense items
So many business owners that were
so focused on growing their revenue that they didn’t realize that they were
actually decreasing their profitability. Watching this on a month by month
basis or on quarterly basis is very helpful to a business owner, you need to
look at the type of revenue. Encouraging business owners to segregate if they
have maybe three different types of revenue generations, that they separate
those into their individual financial statements so they can see where they are
the most profitable.
We do not want to continue
growing revenues in an area where our gross profit percentage is 10 percent
versus the area where our gross profit percentage is 60 or 70 percent. We want
to grow the area where our gross profit, which is our revenue, less our cost of
goods sold, that’s our gross profit. We want to grow our gross profit. There
may be a strategic reason why we would do otherwise. However, if there is no
strategic reason, we really want to drive whatever helps improve our gross
profit.
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Source:coursera
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