Every store is different and therefore will have a different method for achieving its Net Profit goal. For example, if your store is achieving a 45% Gross Profit and you want a 5% Net Operating Profit, then Operating Expenses can be 40%. However, if you want a 5% Net Operating Profit and have a Gross Profit of 40% then Operating Expenses can be only 35%. The only way to achieve your goal is to manage your expenses.
Determining what operating expenses should be for your store, as a percentage of sales, is the easy part. The hard part is in actually achieving your goal, especially when this requires reducing your operating expenses. Making the decision to trim back long-term employees who no longer produce or don't "fit" the profile of a good employee is difficult. There are other equally difficult decisions, but remember that operating at a profit requires actions that are not always pleasant or seen as equitable by all employees. However, doing those things that ensure a profitable business are critical to your store’s survival.
Operating costs (expenses) are controlled when they are measured and managed. Operating expenses are measured when they are categorized adequately in the General Ledger. They are managed when expense budgets are developed and actual results are compared to plans.
There are some expenses over which you have little day to day control. An example of this is Rent or Occupancy Cost. The time to control this is when the lease or lease renewal is negotiated. Another example is property tax.
However, you do have control over the majority of operating expenses. This is where budgeting comes in.Budgets should be prepared by expense account and supported by an understanding of the components of the expense account. Shown below is a portion of a worksheet we have developed as a tool for planning expenses.
One of these worksheets should be completed for each expense account. Doing so helps you to focus on all aspects of each expense item so you can see if any expenses can be reduced or eliminated. It will also be of help during the year if you find the budget for a specific expense item needs to be revised. It enables you to see why the original budget was set for that amount and you can record what circumstances required a change to the budget.
Following are some suggestions for reviewing and reducing some of the store’s expenses:
Payroll: Selling and cashier payroll are a substantial part of payroll costs. Have efforts been made to determine traffic patterns so there is adequate floor coverage during peak selling hours and less staff during the slow periods? Do you use part-time people where ever possible to provide flexibility in staffing--not only on the sales floor but in receiving and in the office? Or, it may be that you are using two part-time people where one better-trained employee can do the job more effectively.
Do you really need an on-site alterations department or would it be more economical (and just as well done) to contract with an outside service?
Do you pay salespeople on a commission basis? If so, are you taking advantage of paragraph 7i of the Wage & Hour Law for exemption from overtime wages for sales staff?
Review your compensation system. Changes may need to be made so as to provide maximum motivation.
Advertising: Advertising expense can be reduced by taking advantage of opportunities afforded you in co-op advertising and rebates.
Are you measuring customer response for various types of advertising to be sure your advertising dollars are spent as productively as possible?
Services Purchased: Are your salespeople doing store housekeeping tasks (sweeping, vacuuming, washing windows) when their time would be better spent sending thank you notes to customers, making phone calls to customers, etc.?
Would it be more economical to have an outside service handle all your bulk mail rather than pay your office staff to do it? They can usually get a lower postage rate for you since they are able to fulfill all the U.S. Postal Service requirements. Many times, the cost savings in postage will more than offset the cost of the mailing service.
Review maintenance contracts to see if any can be dropped. For example, would occasional maintenance of air conditioning equipment actually have cost as much as the annual amount of your maintenance contract?
Insurance: You might be able to have your lease amended - - providing for a mutual waiver of subrogation, at no cost to you or your landlord; eliminating the need for fire legal liability insurance. Increase insurance deductibles where possible to reduce premiums.
An insurance review by an independent consultant can tell you if your insurance coverage is adequate or if you are carrying more insurance than is necessary. Insurance costs may be reduced by developing insurance specifications and putting your insurance out to bid to several agents every three years.
The above are just a few ideas. As you look around your store you can probably find many more. One important idea to keep in mind is that you should not continue doing something a certain way just because "that's the way it has always been done". You need to be continually looking for ways to reduce expenses. This can be as simple as turning out the lights when no one is in the office to as complex a subject as negotiating a new, more advantageous lease. Of course, budgeting is the most effective way to reduce and control expenses.
Let your employees know that reducing expenses is important to you. Ask for their input. You may be surprised at the good ideas they have. Employees will also be more willing to make an effort to reduce expenses if they have had input into the process.
Every dollar of excess operating expense that is saved is a dollar increase in Net Profit. By reducing expenses $5,000 there will be an increase in Net Profit of $5,000 (all else remaining equal). Or, to look at it another way, if your store's Net Profit is 4% of sales, a $5,000 reduction in expenses is the equivalent of increasing sales by $125,000 ($125000 x 4% = $5000).
However, be aware that expenses can be reduced only so much before sales are negatively impacted. Operating a successful and profitable store is always a fine balance between increasing sales, managing inventory and managing expenses.
Remember, every expense dollar saved goes directly to the bottom line. So, spend some time reviewing your company's expenses and see how much you can increase your bottom line. Then, develop your budget and update it monthly to see how you are doing. If you want or need help doing this, check out our budgeting and cash flow service or contact us with questions.