Growing revenue is good but trimming expenses is a considerably faster way to fatten underneath line.
Where did the entire year go? With 2017 arriving at a close, entrepreneurs are diligently planning their 2018 budgets and P&L’s. This analysis, budgeting and forecasting is crucial for your continued success.
Be honest: are you truly do that work or are you merely considering your 2018 financial goals? Every motivational and business speaker vehemently states, "you need to jot down your goals" — so just do it. Should you be doing it, healthy. Should you be not, begin right now!
My company spent some time working with over 10,000 small and mid-sized businesses in my own career — and as a fellow entrepreneur, I am always intrigued and revel in learning from like-minded people how they intend to grow in the year ahead.
Some actual answers to the question from CEOs include:
"I simply hired the very best salesperson so excited for next year."
"Finally, we are starting a social media technique to go viral."
"Our shopping cart software experience is way better and I see sales already growing."
"Internal communication gets better — weekly sales meeting each morning."
"My goal is to go to more customers personally and get yourself a true sense of their experience with this company."
" Our new CRM can make sales tracking that far better for continued growth."
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Every above answer is important, meaningful and true. You should do some or most of these ways of grow your top-line revenue. You will determine whether your goal is ten percent, 20 percent or completely growth. And, these email address details are also shortsighted as over 90 percent of entrepreneurs neglect different ways to show company growth.
How else is it possible to grow? Let’s define growth? There will vary metrics to analyze. I’d argue there is one benchmark to quantify growth. Your bottom-line profitability! That’s it! Are you making the amount of money to that you aspire? Such a very simple concept and one metric that, for me, gets continuously confused.
Everybody knows of SaaS businesses that are showing zero profitability but, due to continued user adoption, can be purchased for a big multiple on top-line growth. When I was an investment banker in the late 1980’s focusing on Wall Street, EBITDA (earnings before interest, taxes, depreciation and amortization) was our constant metric to determine a business sale price. Yes, EBITDA continues to be a very important element in market valuations. EBITDA highlights bottom-line profitability.
Let’s concentrate on another technique to grow or boost your profitability: expense reduction reaches least equally valuable and may be low hanging fruit to improve the worthiness of your company. It isn’t as sexy as growing top-line sales with new marketing strategies, but it’s more valuable. As your business grows, your expenses continue steadily to grow. When was the last time you, your CFO or somebody inside your leadership team was empowered to examine your expenses?
Is expense reduction more valuable than top-line sales? It isn’t. Both are essential but let’s be analytical and compare both sales strategies and expense technique to determine the web bottom-line effect for your company: XYZ Company (they are real numbers from a $1.1M business).
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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 percentage is thirty percent and after labor, cost of goods sold, labor, XYZ Company earned $30,000 on that additional $100,000. Of this $30,000, the business pays its salespeople, independent and salaried, a 50 percent commission.
Net profit on that $100,000 is $15,000 bottom-line to the business.
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This same company employed major expense savings analysis in early 2016 on every major expense line item. For each and every $1 saved is bottom-line in profitability. Savings equaled $42,000 on an annualized based for 2017. As a caveat, you can’t really provide exact metrics because every company differs, every industry unique but I am hoping the logic is reasonable.
Predicated on my analysis with real-life types of companies ranging in a wide selection of industries, a dollar saved is 2.8 times as valuable as a dollar added with new sales. When you have your expenses in order, get back to sales growth, but it’s critical you review your significant expense line items each year.
In XYZ Company, a $1 saved is 2.8 x’s more profitable when compared to a $1 of top line sales growth! XYZ literally made $42,000 in important thing profit, which escalates the EBITDA bottom-line.
Now, let’s involve some real fun and extrapolate the upsurge in company value if the CEO desire to sell or exit from the business enterprise. As stated above, using multiples to determine a sale price is a common accounting methodology. Multiple ranges greatly based on many variables and industry types. Let’s use a five multiple common in XYZ Industry.
This $42,000 in cost savings just added $210,000 in equity value to the business. Pretty good.
Some expenses to spotlight include shipping, phone, banking fees, utilities and credit card processing fees, merely to name a few. The "hidden fees" prevalent in these expense categories is disturbing and offensive. Yes, I take advantage of this word purposely. The business enterprise owner is being rooked. Do you really discover how to "read" your electric bill, telephone bill or credit card processing statement? I don’t (aside from the credit card bill because I’ve spent 20 years for the reason that industry).
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I think it is completely frustrating. Why can’t only once a company be pro-active and call me and say we found one in your bill or we’ve a new program that may save you money! It generally does not happen.
As the entire year ends, consider both growing top-lines sales and "sharpening your pencil" on all of your expense items. Take a deep breath and either take ownership of your expenses or empower somebody inside your organization to get these line items in order.
Whether you utilize internal personnel or outside consultants, it’s your responsibility to be section of the leadership team to examine your P&;L. It isn’t hard. Just take action. Doing both these strategies concurrently can make for a far more profitable 2018.