August 10, 2011
Disclaimer – For this piece I consulted with a business advisor who has requested anonymity. His background, however, includes more than 30 years in the international finance world and nearly 10 years as the president of a local bank where he worked daily with small business entrepreneurs. He has also been a financial advisor and consultant to numerous small businesses around the country as well as being on the board of several nonprofits. He has personally been critical in helping me get my own small business up and running and I trust his input implicitly.
If you own a small business – food or otherwise – the economy likely has you very worried. The stock market has dropped upwards of 12% in the past few weeks, the US credit rating has been downgraded, and the TV talking heads are saying that we are headed into a double-dip recession or worse, a unprecidented full-fledged second recession right on the heels of the first. To make matters worse, stubbornly high unemployment and underemployment, which is likely to persist for some time, has some economists now predicting that GDP growth will only be in the 2%-2.5% range for 2012. It’s time to batten down the hatches and prepare your business for a very slow, erratic, recovery for the next few years. Yes….years!
So what can you do?
Give your business a complete physical, from head to toe, and if you haven’t done so recently, let’s start now. Today we’ll look at the Income Statement side of the equation, tomorrow we’ll check in with Revenue, and on Friday we’ll end the week by talking about Balance Sheets.
Let’s tackle operating expenses first, as that’s the areas where you may find some immediate savings. Start with the biggest expense categories first and go down each category and try, on an overall basis, to reduce your total operating expenses by, for example 10%.
- Payroll– If you have employees, you may want to carefully look at your staffing schedule, and adjust the hours to better track your daily/weekly sales activity. All businesses have busy and slow times during the week, and on weekends. Try not to “overstaff” in the slower periods. As the “pulse” of your business fluctuates, your staffing levels should as well. Also, take a look at your own hours. Maybe you can, and should, be working more hours. Better to pay yourself than pay others.
- Rent– If you rent commercial space – be it a kitchen for all your food preparation or a store front, unless your lease is approaching renewal there may not be much you can do to reduce your rent. However, if it is coming up for renewal, do your research by talking to realtors familiar with your area, and find out current lease rates for comparable space. That way, you’ll have facts to support your request for a lower rent. No landlord wants a vacant property, not in a slow economy. Do your research, respectfully make your case, and try for a fair, but lower, rent, and if your landlord doesn’t agree. Even if your lease isn’t up for renewal, (or your landlord doesn’t agree to a reduction) there’s something else you might consider. Unless your business has level sales throughout the year, you’re probably experiencing some level of seasonality. For example, if your sales, by quarter run 15%, 40%, 20%, 25%, talk with your landlord about paying the rent in this manner as well, i.e. lower in the weak months and higher in the strong months. At the end of the year, the landlord has received the full contractual rent and you have better managed your cash outflows to reflect the seasonal nature of your business.
- Advertising– This item is very difficult to determine whether you are getting a strong return on investment, e.g what happens to sales if I do 10% more, or 10% less. All I can suggest here is that whatever you do, try to use the social media more (Facebook and Twitter), than you have in the past, and see if this “free” advertising, which is targeted to your customers, provides some additional lift to your sales. I remember driving past a Krispy Kreme shop just as the sign lit up, announcing that fresh hot donuts just came out of the oven. Of course, I stopped. This is just an example of how you could target a message to your customers on your company’s Facebook page. Advertising can be a big expense item. Analyze it very carefully, and try to determine where, and whether, you’re getting your bang-for-the-buck.
- Utilities- Do the same thing in your business that you do at home. Conserve, conserve, conserve. Some utility companies, based on an analysis of your past usage, permit a monthly level payment program, which, depending on where you’re located, can even out the heat/electricity costs over the course of the year. For example, in the northeast, where it’s cold and dark in the winter months, heating bills skyrocket in those months, and depending on your company’s sales seasonality, that might not be the best time to have high utility costs. A level payment plan may work better.
- Credit Card Processing Fees- Get competitive processing charges from a couple of providers to ensure that you’re getting a fair deal. I am aware of one recent case where the processing company was going to increase the processing fee by 40% because “swiped” transactions fell below a certain threshold. The retailer moved to another provider. Don’t allow yourself to be taken advantaged of. Negotiate everything, and if necessary, move your business elsewhere.
- Phone/Fax/internet-Keep track of when your contract expires as bundled charges have generally fallen overtime and you can get a better deal. The owner of a lingerie shop I’m familiar with, reduced her monthly bundled charges by 25%, as her contract term was approaching.
- Supplies, Maintenance, etc- Analyze everything. For example, if you’re providing free coffee or sodas to your employees, think again. Add that up over the course of a year. If you still want to do it, that’s fine, but know the cost of what you’re providing. Perhaps instead of taking money from petty cash to get that daily caffine fix for the staff it makes more sense to purchase an office coffee machine and brew fresh every morning. Even if you purchase expensive beans you’ll likely still come out ahead at the end of the year and your employees will still be happily caffinated.
These are just a few of the bigger expense categories, but don’t neglect analyzing each one, no matter how small. Every dollar saved adds up.