Disclaimer: I am not a financial advisor or accountant. This article is for informational purposes only. Please use the info at your discretion.
Are your overhead costs out of control?
When your top line revenue is solid, but your bottom line isn’t as much you’d like, a good area to examine is overhead costs.
Wait, rewind. What is top line and bottom line? What are overhead costs?
Top line revenue is the total dollar amount your business did in sales. If you sold 100 plants at $10 a piece, you did $1000 in top line revenue.
But that’s not what you cleared on your bottom line. Your bottom line (aka net profit) is what your business clears after expenses. If you did $1000 in top line revenue, with total expenses for the period of $950, then your bottom line was $50. Not good.
Clearly the expenses are too high. There are two types of expenses - variable costs and overhead costs. Variable costs vary according to the volume of your goods output. We’ll talk about these another day.
Overhead costs are fixed expenses, meaning they don’t change based on volume of goods output. They include expenses like rent, utilities, insurance and office supplies.
If you have high revenues, you should be clearing a decent bottom line profit. Digging into your specific overhead expenses and cutting them may help you get there.
But there is one major thing to keep in mind when cutting costs:
Don’t cut anything that would sacrifice the quality of the company.
That may seem impossible - but there are likely many ways you can creatively cut overhead expenses, yet keep the business quality intact. You could reconfigure your space (eliminating unnecessary sq ft to reduce rent), negotiate or lower usage of utilities, go paperless, create more efficient systems, shop around for different accountants and insurance providers, etc.
Take the same mentality you’d use if you needed to cut expenses in your personal life and apply it to your business. But remember: don’t cut anything that would sacrifice the quality of your business. It may be tempting to save money in the short-term, but it essentially would be shooting your business in the foot in the long-term.
You may not be happy with what your net profit is. Don’t just accept it as is or blindly push for more sales. Dig into your overhead expenses. You may find they're a lot higher than they need to be.
Working to lower your overhead expenses will increase your bottom line. A penny saved is a penny earned (except the net effect of saving a penny is less than a penny because of taxes on income after expenses, but that’s for another day...).