Need to get a grip on expenditures in today’s tight economy?

March 28, 2008

In today's tightening economy, profitability is a more critical issue than ever.

On paper, the profitability formula is quite simple:

Revenue minus costs minus expenses = Gross Profit

Just because your revenue increases doesn't mean you take home more money; if your expenditures to generate that revenue increase the same proportion as your revenue, then your profits do, in fact, increase.

But what if your expenditures increase disproportionately, relative to your revenue, even though your revenue increases? Then you make less profit.

How long will you stay in business doing that?

Especially in today's rugged economy, the smart strategy is to both increase revenue and reduce expenditures (I'm defining expenditures as line items such as costs of goods, costs of sales, and general operational expenses)

To decrease expenditure, adopt the practice of spending resources only on high-impact essentials. So, what's a high-impact essential?

A high-impact essential is any purchase (a tool, equipment, service, etc.) that meets one or more of the following criteria:

1. Increases revenue.
2. Increases profitability.
3. Decreases costs and expenses.
4. Enhances productivity and safety.

Here's a real-life example, albeit a simple one, to illustrate my point...

A couple of years ago, I bought a new computer bag, though the one I had was working just fine. The new bag cost just under $400, but I justified the new bag because:

• It had wheels. (You know, gotta save my shoulder and neck from the strain of lugging things around.)
• It was made by the same company as our other "lifetime warranty" luggage, so it was a perfect match.
• It was "more cool" than my existing bag.

After I brought it home, I proudly set it down on the floor of my office. It sat there for several days looking really cool, but something bothered me about the bag, and I didn't know what it was.

Then I realized what it was; I hadn't applied my "buying decision matrix" to the purchase:

Did it have the potential to:

 

1. Increase revenue? NO!
2. Increase profitability? NO!
3. Decrease costs and expenses? NO, it actually increased it?
4. Enhance productivity and safety? NO, not really.

Bottomline, I took the bag back to the store and felt really good about it.

So, my strong advice is before you or your team members make any purchasing decisions, however small or large, consider the above buying criteria. It'll simplify the clutter in your physical space, minimize any mental agony around purchases, and it'll give you a fighting chance to enhance your real bottomline.

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