Increasing the turnover of your business is not always enough to improve your profit margins. Cost control and reduction of overheads play an important part in managing the margins of small businesses. Some costs are hard to cut back but others can be easily controlled to stop direct and indirect costs getting out of hand.
This guide from SmallBusiness.co.uk and purchasing service Companeo helps you consider your business spending and highlights areas where you can make some easy reductions.
Analyse your expenditure - This may sound obvious, but the expenditure of a business must be kept under control. Take stock and see where you can make cuts.
The profit and loss account of your business is the ideal place to start your analysis: it sets out all of the previous year’s expenditure and income. Identify the outgoings that you would like to reduce and those that you absolutely have to cut.
Check your net margin - Know exactly what margin you stand to make on your services or products. Are you charging enough to cover your costs?
- Calculate your operating costs. Make sure you include employees’ salaries and all related costs, distribution and storage, as well as the actual cost of production. This process can also be applied to a service.
- Make a list of indirect and administrative costs. This includes rent and property expenses; utilities - electricity, water and gas; insurance; salaries of management, administrative and maintenance staff (including all associated costs such as national insurance contributions); telephone; postage and suppliers.
- Add up all the costs and expenses and subtract this figure from your turnover. This is your net margin. To work out the net margin of specific products or services, do the same exercise but only taking into account costs incurred by that particular product or service.
Take action - Review your spending patterns, standing charges and working practices, you may be surprised by what you can save