If you are starting a business the preservation of capital is critical to whether you will be successful or not. This means managing all expenses, but especially the largest expenses. In most businesses the largest part of their expense base is Rent, Payroll Advertising and Insurance. Focusing on managing these expenses will provide you with the biggest bang for the buck.
Rent- Business owners think it is impossible to re-negotiate the rent because you have a lease, but the landlord does not want to lose a tenant, especially a commercial tenant where they would have to do another build out and/or deal with the cost of vacancy. Most landlords understand cash flow problems because many of them have experienced cash flow problems themselves through real estate downturns. What I found to be the best way to negotiate with the landlord is show them your financial statements and show them what concessions you need in the short term based on the financial position of your business. Then show the landlord how you are going to pull through the difficult times and how his rent concessions are necessary in order to pull through. Be as open as possible. If you have to, you can add the concession money to the back end of the lease or you can add another year to the lease as a way to give the landlord something for the concession.
Payroll - There is usually always a way to cut payroll, whether it is by laying off employees or reducing employee hours. Certainly you work to keep your "A" players and let go the inferior workers. In retail, another strategy to cut payroll hours is to change the store opening and closing times so there is only one eight to nine hour shift.
Advertising - I don’t like cutting advertising, but there are ways to cut advertising without making a dramatic impact on sales. If you have been tracking what works for you, then of course you will know what to cut by eliminating the advertising that is not working. Other ways to cut is by reducing sizes of ads, changing from 4 color to 2 color printing, developing more of a web presence using search engine optimization strategies or doing more 10 second cut-ins on the radio versus 60 second spots. If you have not been tracking your advertising then you must make difficult, uneducated choices as to what to cut. Consider this. The better job you do in cutting Payroll, Rent and Insurance the more you will have for advertising and if you monitor your advertising you can be sure to put those additional dollars toward the most productive advertising.
Insurance – Start with health insurance. Get quotes from 4 health insurance providers. What I found is that although rates are basically the same, you will find one creative provider who will figure out a way to cut your Medical Insurance cost to the lowest possible amount. You may also have to reduce the employer paid portion and put more of the cost burden on the employees.
Get quotes from 4 commercial insurance providers. Commercial insurance carriers get very competitive and usually sharpen their pencils on General Liability insurance policies. If you have an umbrella policy, reassess the need to continue it.
Here is an example:
I had a client in the construction business that had an umbrella policy that was costing them $17,000 per year. However the only reason for the umbrella was to bid on huge commercial jobs. The previous year they never won a bid of any of these large commercial jobs. They were not even close. Large commercial jobs were not the market that they could compete in. Their sweet spot was mid range jobs that did not require they carry an umbrella. We dropped the umbrella and saved $17,000.
Most business owners wait until there is a downturn in their business before they assess the size of their overhead. Assessing the size of overhead should be an ongoing process no matter how good or how bad business is. The key to managing overhead is to review your P & L every single month and if an expense is higher than it was the previous year you need to find out why. The next step is to pick 3 expenses every month and get competitive quotes to stay on top of changes in price in the marketplace for that product or service.
