In example one, the CEO employed different sales strategies in late 2016 and top line 2017 grew by $ 100,000 to $ 1.2 annually. Profit margin is 30 percent and after labor, cost of goods sold, labor, XYZ Company earned $ 30,000 on that additional $ 100,000. Of that $ 30,000, the company pays its salespeople, independent and salaried, a 50 percent commission.<\/p>
This same company employed major expense savings analysis in early 2016 on every major expense line item. For every $ 1 saved is bottom-line in profitability. Savings equaled $ 42,000 on an annualized based for 2017. As a caveat, it's impossible to provide exact metrics because every company is different, every industry unique but I hope the logic is reasonable.<\/p>
Based on my analysis with real-life examples of companies ranging in a wide variety of industries, a dollar saved is 2.8 times as valuable as a dollar added with new sales. Once you have your expenses under control, go back to sales growth, but it's critical you review your significant expense line items every year.<\/p>
In XYZ Company, a $ 1 saved is 2.8 x's more profitable than a $ 1 of top line sales growth! XYZ literally made $ 42,000 in bottom line profit, which increases the EBITDA bottom-line.<\/p>
Now, let's have some real fun and extrapolate the increase in company value should the CEO wish to sell or exit from the business. As mentioned above, using multiples to determine a sale price is a common accounting methodology. Multiple ranges greatly depending on many variables and industry types. Let's use a five multiple common in XYZ Industry.<\/p>
This $ 42,000 in expense savings just added $ 210,000 in equity value to the company. Not bad.<\/p>
Some expenses to focus on include shipping, phone, banking fees, utilities and credit card processing fees, just to name a few. The "hidden fees" prevalent in these expense categories is disturbing and offensive. Yes, I use this word purposely. The business owner is being taken advantage of. Do you really know how to "read" your electric bill, telephone bill or credit card processing statement? I don't (except for the credit card bill because I have spent 20 years in that industry).<\/p>
Related: 7 Mental Shifts That Allowed Me to Become a Millionaire at 22<\/a><\/b><\/p>
I find it completely frustrating. Why can't just once a company be pro-active and call me and say we found an error in your bill or we have a new program that will save you money! It doesn't happen.<\/p>
As the year ends, think about both growing top-lines sales and "sharpening your pencil" on all your expense items. Take a breath and either take ownership of your expenses or empower somebody within your organization to get these line items under control.<\/p>
Whether you employ internal personnel or outside consultants, it's your responsibility as being part of the leadership team to review your P&;L. It's not hard. Just get it done. Doing both of these strategies concurrently will make for a more profitable 2018.<\/p>