Understand Your Expenses
Business expenses can assume various forms and broadly can be categorised as:
1. Fixed Costs – these costs stay the same, these include expenses such as rent payroll, insurance
2. Variable costs – these costs do change according to the output produced or sold. Common expenses under this category include direct materials, commissions, piece-rate labour.
3. Sunk costs – Money spent which cannot be recovered. Costs typically include marketing, fixed asset purchases.
4. Opportunity costs – the difference between a chosen action versus one that is foregone
5. Avoidable costs – items that are not necessary
Perform breakeven and profitability analysis
1. Find your gross profit ratio; (Gross Profit/Net Sales)*100
2. Breakeven analysis will tell you how many units of a product must be sold to cover your fixed and variable costs
3. Create a breakdown of your different products and their generated income and expenses
4. This will help you understand your most profitable products
Create a Strategic Budget
1. You must review your budget every month to check that you are aligning with your expenses and your goal income
2. A budget will also help you find areas of overspending and help you manage every area of your business
Monitor supplier costs
There are three key-ways to lower them:
1. Ask for a discount or discuss what value-adds they can provide.
2. Review your contracts. If you have been in business for a while evaluating your contracts and renegotiating their terms can be a great way to lower your costs.
3. Investigate cheaper alternatives without compromising on quality.
Increase your profitability
There are four key-ways:
1. Differentiate your customers; this can be done with personal branding or a follow up after they have received your product
2. Focus on Customer Loyalty
3. Redesign workflows and systems for greater efficiency
4. Make buying from you easy and simple
