Locating Reducible Expenses
Growth often means that your business's expenses will go up. Managing these expenses can help you thrive during growth periods as well as survive times when your consulting business isn't growing.
Your income statement provides a summary of expense information and is the focal point in locating expenses that can be cut. For this reason, the information should be as current as possible. As a report of what has already been spent, an income statement alerts you to expense items that should be watched in the present business period.
If you get an income statement only at the end of the year, you should consider having one prepared more often. The end of each quarter is usually sufficient for smaller firms. Larger consulting services should receive the information on a monthly basis.
Two Income Statements
The best option is to prepare two income statements. One statement should report the sales, expenses, profit and loss of your operations cumulatively for the current business year to date. The other statement should report on the same items for the last complete month or quarter.
Each of the statements should also carry the following information:
This year's figures and each item as a percentage of sales
Last year's figures and the percentages
The difference between last year and this year — over or under
Budgeted figures and the respective percentages
The difference between current year actuals and the budgeted figures — over or under
Average percentages for similar businesses (available from trade associations and the U.S. Department of Labor)
The difference between your annual percentages and the industry ratios — over or under
This information allows you to locate expense variations in three ways:
By comparing this year to last year.
By comparing expenses to your own budgeted figures.
By comparing your percentages to the operating ratios for similar businesses.
The important basis for comparison is the percentage figure. It represents a common denominator for all three methods. When you have indicated the percentage variations, you should then study the dollar amounts to determine what kind of corrective action is needed.
Because your cost cutting will come largely from variable expenses, you should make sure they are indicated on your income statements. Variable expenses are those that fluctuate with the increase or decrease of sales volume. Some of them are overtime, temporary help, advertising, salaries, commissions, and payroll taxes. Fixed expenses are those that stay the same regardless of sales volume. Among them are your salary, salaries for permanent employees, depreciation, rent, and utilities.
When you have located a problem expense area, the next step is obviously to reduce that cost so as to increase your profit. A key to the effectiveness of your cost-cutting action is the worth of the various expenditures. As long as you know the worth of your expenditures, you can profit by making small improvements in expenses. Keep an open eye and an open mind. It is better to do a spot analysis once a month than to wait several months and then do a detailed study.
Take action as soon as possible. You can refine your cost-cutting action as you go along. Be persistent. Results typically come slower than you might like. Keep in mind that only persistent analysis of your records and constant action can help keep expenses from eating up profit.