Cost cutting is often associated with down times. Weak sales or increased competition may force a business owner to reduce expenses to maintain a satisfactory profit margin. A skilled entrepreneur watches costs even when business couldn't be better.
Wise reductions in specific fixed and variable expenses offer a number of benefits. It makes the business more efficient, provides opportunities to cut prices, and makes it easier to build reserves.
But deeper-than-necessary cuts to the operating budget could hurt your business when they affect legitimate expenses. Make sure you understand every segment of your operations. Compare your financial data to see how closely you are operating within industry norms.
A break-even analysis will show the volume point at which gross profit equals expenses. From that point on, a business moves from a loss to a profit.
One way to reduce costs without cutting is to increase the average sale per customer. This allows you to spread the same expense across a larger income.
Regardless of volume, you need to build in a solid profit margin on your sales. If you earn a small profit margin on some goods due to competition, try to add a higher profit margin to other products. Your objective is an average profit margin that meets your business goals.
Stephen L. Rosenstein is co-chairman of Greater Baltimore, SCORE Chapter No. 3. Call 410-962-2233 to speak to a SCORE counselor or visit www.scorebaltimore.org To send a question to SCORE representatives, e-mail smallbiz@baltsun.com