I have been asked this question numerous times by small business owners “How do I make my business more profitable?” The question became even more relevant in the last couple of years when the economic downturn and amnesic growth reduced gross income while inflation is quickly increasing the cost of goods and expenses associated with business operations.
Let’s look at the Real Estate agent (my client) whose business turned sour at the end of 2008, the time of major stock market crash, who discovered himself in the position when his expenses suddenly could not be covered by the income generated from the business. Just cutting expenses was not an option, because in his case most of the expenses were geared towards marketing activities and were supposed to generate new business. Wait it out could have been another solution but forecasting the length of the downturn always proves forecaster wrong.
This agent has approached me for the tax planning services just before the year end, and I offer him to review not only his financials but also his operating activity to help him with his budget. My goal was to capitalize on the small business flexibility, which usually is absent in the large corporation due to complicated command structures and poor communications. Flexibility in small business means an ability to make quick decisions and rapidly implement them. The timing of these decisions is crucial because slight delays may cause severe financial damage. We have reviewed the agent’s expenses and analyzed them. For budgeting, we took an approach which is called zero-based budgeting
A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a “zero base” approach and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.
The process allowed us to cut unnecessary expenses which became custom of habit such because they were implemented so long ago. We also did not budget for items which would be excessive in the recession. However, we have decided to redeploy freed up funds into new technologies which would allow the agent to reduce some expenses but at the same time increase marketing exposure to new areas.
This approach allowed the agent to position himself in the safe heaven during early 2009. The market has made a 180-degree turn in 2010, and the agent was ready for it and he made necessary adjustments based on 2008 experience and took full advantage of it. 2010 ended up being a record year for this agent.
However as simplistic as it sounds the solution can be defined by two words only – “flexibility” and “discipline”.
Every business has its own specifics and particulars it is important to monitor your budget often to determine where you need to spend more to make more and where you can cut back because you’re just not getting results.