“Times are tough. I’ve had fewer customers and I’m losing money. What should I do?” I often hear this question as I travel the country, teaching seminars and coaching our clients. The fact is, when you need to raise profits, you have only three choices: increase sales, raise margins, or cut expenses. You can do one, two, or all three.
prices in the hope of increasing sales is the first tactic most storeowners
think of. In reality it should be a last resort. Slashing prices almost never
increases sales enough to raise profits. (The only benefit is keeping your
installation crews busy.)
second option, raising margins and prices, seems counterintuitive in a
challenging business climate, but I’ve seen it work. If you appeal to
higher-end customers, you’ll find they don’t mind paying extra for
extra-ordinary benefits that go beyond just the flooring product. To succeed,
you must market yourself precisely.
retailers, the most effective tactic is to cut expenses, primarily because it’s
the tactic you can control. (It doesn’t require you to influence customers to
change their habits.) Adam Smith, the founder of free market economics,
extolled the virtues of watching your pennies (he called it “parsimony”). It is
that habit “and not industry [hard work], that is the immediate cause of the
increase of capital. Whatever industry [higher sales] might acquire, if
parsimony did not save and store up, the capital [equity] would never
[increase].” In other words, we can easily spend faster than we earn.
every dealer can find fat and waste in store expenses. In good times, when
money flows fast, we’re often too busy to monitor expenses. To get work out the
door, we hire more people, replace vehicles and equipment, and invest in
capital improvements. Then, in hard times, we feel pinched.
message: If you run a small business, whether in bad times or good, you should
require a solid reason to spend every penny-every day, every week and every
month. Consider expenses as necessary, but enemies of profit. Money spent never makes it to the bottom
line-or our pockets. Another benefit of being a penny pincher will likely be
reduced fixed expenses. Look for way to reduce your “nut” (what you need to
crack to pay your bills). Thus, every penny saved gets you sooner to your
breakeven point, after which you make your first dollar of profit.
now have more time because of a falloff in customer traffic, you can profitably
spend your time scrutinizing every expense. I recommend you begin your
parsimony by examining your largest category of expenditures. Typically, the
No. 1 item is payroll. First, look at the total hours your employees work. If
sales are down, where might you cut hours without compromising customer
service? Alternatively, could you hire a part-timer in some positions instead
of a full-time staff member? Part-timers usually require no benefits. However,
before you start cutting hours, think of ways that your underused employees
might help bring more customers to your store. You don’t want to cut when you
can find ways to grow.
recent column, I urged you to scrutinize your employees’ productivity. The
question remains: Does each employee generate sufficient Gross Margin to
justify his/her wages?
take these cost-cutting measures, try not to stress too much. Decisions
involving personnel can be the toughest, but cutting back on payroll may save
your business. Once you determine that layoffs are the last-but perhaps
best-resort, you can proceed without feelings of remorse. (You know that you
really had no alternative.)
to announce the downsizing with empathy and sensitivity. How you handle this
awkward situation sends a strong message to people still onboard, as well as
those who leave. If you must reduce your workforce you will, of course, want to
look first for people who may voluntarily retire and any employees who don’t
fit your culture, are mistake-prone or under-perform relative to your other
who are also family members compound this problem. I had one client who sold
just $1.1 million a year, but carried 11 full-time employees (over twice the
industry average). I recommended he discharge half his people. His reply, “But
they’re family!” Maybe the family would be best served if half of them worked
about the cost of employee benefits? Do you pay all their insurance premiums?
One of our clients discovered that many competitors paid only 50 percent of the
employees’ benefits, instead of 100 percent as he was doing. Could you ask your
employees to contribute and not fear they will leave you?
dealer supplied a cell phone to each employee. As he scrutinized the bills, he
found they were misusing them. He terminated the cell phone plans and instead
reimbursed them for business calls on their cell phones. He saved money. Which
other benefits might be allowing your employees to take advantage of you?
rent? Might your landlord be willing to renegotiate your lease in order to keep
you as a tenant? If you don’t ask, you won’t ever know. In addition, you could
follow the example of two clients who reduced their effective rent or mortgage
payments by leasing space they’re not currently using. Do you have an office
used only for storage? What about unused warehouse space? Could you rent them
out? As to mortgage payments, could you lower your payment by refinancing at a
lower interest rate or longer term?
about utilities? Are you wasting energy? Many utility companies will visit your
business and conduct a free energy audit. They may find ways to lessen your
energy use, as by switching to energy efficient lighting, adding insulation,
installing programmable thermostats, and connecting timers to inside and
lower your trash dumping fees by recycling? One dealer started recycling
cushion and thereby reduced his trash hauling fees enough to add a warehouse
person. You may even leverage your customers’ desires to save the planet:
charge them a “green fee” for taking away their old flooring.
donating cushion to your installers? Fact: If you send them out with full rolls
of cushion (instead of cutting just enough for the job), you are throwing money
away. Have you ever wondered why your installers never buy cushion from you
when they buy carpet for their own home? Even if you cut cushion at least 10
percent on large jobs, your installers would still not need to buy cushion for
their own home.
the last time you kept your insurance agent honest by asking another agent to
bid on your insurance? Agents tend to become friends. In these times, you may
have to put cash flow over friendship. Also, when was the last time you
questioned your tax assessment? I know a dealer who challenged his. The local
officials lowered his property tax substantially.
is another area prone to high waste. Test every ad. Don’t invest a wad of money
on a particular message or medium until you know which ads drive customers to you,
and which don’t. People in advertising are fond of saying, “Fifty percent of
all ads don’t work; unfortunately we don’t know which 50 percent.” You can find
out by asking every customer which promotion brought her to the store. Also,
use all the co-op money your vendors offer. During recessions, you should not
reduce your marketing. Research shows that when a company cuts back on ads in
lean times while its competitor stays the course, the company that keeps
advertising sees relative growth of 10-14 percent.
By reducing expenses in these and other ways, your breakeven
point will go down-as will the stress of worrying about your business. Benjamin
Franklin realized the toll of worrying, when he observed that, “Waste is worse
than loss.” In today’s slow times and in future fast times, you’ll benefit by
making a habit of scrutinizing your expenses. If you don’t, as Confucius wrote,
“He who will not economize will have to agonize.”
Habit: Scrutinize Every Expense - Lower Your Breakeven
July 22, 2008