Situations in which you are forced to examine the validity of your own decisions are innately uncomfortable for human beings. Cognitive Dissonance ensues and only once we have confirmed our decision, or corrected our error, can we return to a state of comfort. Now, that was a complicated way of saying “people don’t like it when they have to second guess themselves!” As a result, one of the most challenging steps in the Profit First implementation process is the operating expenses review. Every expense in your accounting records represents a decision you made or an action you took at some point in time. Questioning the need for a particular expense means challenging yourself and the decision you made.

 

The process – lets cut some costs

Every business, regardless of it’s size or industry is wasting money on something. Even brand-new (start-up) businesses have subscribed to something that the business could operate without in its current format. If you have worked through the review and you can’t find anything I challenge you to look harder.

While the review sounds simple enough it is far more complex than it appears. To complete the process you need to examine each cost the business incurs. However you also need to consider whether or not that expense only exists because your business is improperly structured. Can you change your business model and by doing so eliminate costs that people in your industry usually incur?

What do i mean by change your business model? I can give you a classic example from my industry – Accounting. Traditional accounting firms have large offices full of staff and equipment. The big firms have whole floors of large buildings just for physical document storage. For those businesses rent is a fix, unavoidable costs. However, technology has changed the accounting landscape in recent years. Cloud systems like Dropbox, Slack, and Xero allow firms to service their entire client base, manage a team and store all their information online from anywhere in the world. Less than 50% of my total client base actually live in Brisbane and because of this I don’t have office space. Physical meetings are held in a cafe (or a pub..if i’m completely honest!). Through a smart approach to technology accountants have been able to establish a new business model and remove ‘rent’ as an essential cost of doing business.

No, lets get started…Work systematically though the expense accounts in your accounting system. Determine what each cost is for and if you really need it. Be honest with yourself! I recommend creating three lists:

  1. Costs you can do without;
  2. Costs that you need, but maybe not right now; and
  3. Absolutely necessary expenses.

Costs v’s Efficiency

I’m certainly not recommending you cut every cost your business has. Some costs are simply unavoidable and others, while optional, make the business more profitable. This is where the concept of efficiency comes in. If you incur an expense to make your business more efficient and the business will see increased profitability in the short term because of the purchase then keep it. However, if you’ve made the classic mistake of ‘investing’ in equipment, rental space and systems that the business is going to take years to grow into then consider whether the cost is necessary right now.

 

Implementation:

Step 1 – Cancel everything in list 1

If you don’t need it then don’t by it. You didn’t start your business to put money in other people’s pockets. You can’t always cancel expenses on the spot. If you are locked into contracts then flag these expenses to be cancelled when renewal comes up.

Step 2 – Research Alternatives

For items that you have deemed necessary do some research into alternatives. The aim here is to find a cheaper way to achieve the same outcome. As I mentioned earlier don’t just think about the cost in isolation. Focus on the way the business services your customers. Can you change a process and make the product/service cheaper to deliver somehow?

Step 3 – Negotiate

If an item is business critical and there is no cheaper alternative its time to negotiate. Will the supplier offer a discount to prevent you from cancelling? You’d be surprised how often they will offer a free month or a 1 year discount rate to keep you.

 

Conclusion

The reality is your business will never reach your Profit First Targets without reviewing your expenses and making cuts. I usually recommend my clients aim to cut 10% out of their total operating expenses in the initial implementation process. This can take some time but persist with it. Your long term financial position depends on it!

 

My own experience

I’m a huge fan of business automation. I’m constantly looking for opportunities to use systems that will improve the internal operations of my business as well as my customer’s experience.

Very early on I was looking for a customer database application that Panic Atax could use to store everything we knew about each client and to trigger reports and/or emails based on specific variables. At the time the firm only had about a dozen full service business clients and estimated year one revenue of less than $50,000.

I found myself on a call with Salesforce who are arguably one of the industry leaders when it comes to business database applications and customer experience automation. They ran me through everything the application(s) could do and answered every question I had. Everything sounded great but the price was quite high. I sold myself on the idea because the system would help us grow faster and save a lot of internal administration time. So I handed over the annual $3,000 subscription, met with one of their $250/hour implementation partners and we got started. Yep, I’d just committed to spending over 10% of my total expected income for the year on one system that we’d have to grow into…classic mistake!

I invested hours of my own time to learn and customise the system in an attempt to keep the external costs down. The consequence of that was the firm’s most experienced team member was in the office playing with software instead of growing the business. So, now we had an expensive software package which we needed to grow into that was actually contributing to us growing more slowly than we otherwise would have.

Fast forward 12 months and the system was working but we were using about 1% of what the application is capable of. An email comes in with the renewal invoice, its time to pay another $3,000. The business has Profit First running far more effectively than it had on day one so this invoice, like all others, had to pass the review. There was no doubt that the business was years from growing into a system that size. Far more cost effective options existed which would work perfectly well for a business our size. All of that was clear and yet the discussion went on.

The barrier here was my own ego. I’d made this purchasing decision, I’d invested my own time and money into making it work and I needed to admit my mistake. Two days before the invoice was due I cancelled Salesforce. Not through any fault of Salesforce, this was my error in judgement and if I wanted my business to prosper I had to take corrective action.

The result? We now use Workflowmax as our client database as well as tracking our workflow processes. It worked perfectly right out of the box and for Xero partners its free! We use Activecampaign for sending out group emails which costs about $15 a month. They also have a free option.

Reviewing that one invoice, swallowing my pride and looking for a better option saved the business thousands of dollars every year. Don’t let your pride send you broke!

 

Further Information

Read our comprehensive review of Profit First here

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