Jennifer Barnes, an Entrepreneurs' Organization (EO) member in San Diego, is founder and CEO of Optima Office, offering outsourced accounting services with a flexible, scalable approach to support businesses of every size―from providing entire accounting departments to filling gaps on existing teams. We asked Jennifer about best budgeting practices to enhance revenue. Here's what she shared:
In your company, is profit "whatever happens to be left over" after expenses are paid, or is it a goal you plan for? What if I told you that how you view profit has a direct impact on whether you're likely to achieve one?
How do you plan for profit? First, find your break-even point. To do so, calculate your burn rate, which is gross profit less average monthly operating expenses. Multiply by 12, and that's your annual break-even point.
Next, determine the percentage of profit you want to make. This means taking a hard look at your budget and eliminating items that are nice to have, but not essential. If there's room in the budget once you've hit your ideal net income, you can begin adding back nonessential expenses.
Here are six ways to separate nice-to-haves from must-haves on your way to eliminating unnecessary expenses:
1. Start with a clean slate
It's a financial best practice to build your entire budget from zero each year. Most companies simply add and subtract items from an existing budget. The clean slate approach takes you out of your comfort zone, forcing you to justify each line item. If an expense is deemed unnecessary, you must find a purpose to support its cost. In other words, if you want a fancier desk because it looks nice, you'll have to cut something else.
Pro tip: Making sure every expense has a profit-driven purpose--known as zero-based budgeting--means that managers must justify every line item. This makes them laser-focus on spending to determine which expenses are necessary and which are not.
2. Evaluate vendors
Which vendors are vital and which could be eliminated or shopped? Seek bids for ongoing services, especially if a specific deliverable has gone years without contract term changes. For example, merchant fee amounts have dropped in recent years and prices are competitive, so shopping this service might save you a couple of percentage points. Other target areas to examine include insurance, office supplies, payroll and professional services.
Pro tip: Ask vendors if you can lock-in current prices for an extended term or get a discount for spending more.
3. Examine subscriptions
Are you in the business bad habit of not canceling "trial" subscriptions? If so, you've been paying every month since your 30-day opt-out period expired. There are likely forgotten monthly subscriptions that your company pays for but doesn't use. Office supply subscriptions also merit a closer look: You may be set up for pricey auto-shipping, even if the service is rarely used.
Pro tip: Ask about discounts for paying in advance. The easiest way to handle this from an accounting perspective is to book the cost to prepaid expenses and amortize the monthly fee with a journal entry. You'll also want to keep a schedule that ties monthly to your balance sheet.
4. Analyze your employees
Are you getting the most out of your payroll budget? Review utilization numbers to ensure that your team is as efficient as possible. Do you have employees working 40 hours but accomplishing 45 hours' worth of work while others barely move the needle? If you bill for services, are you looking at billable hours, calculating an average cost rate and applying that to the cost of goods sold to each client? If not, it's time to start.
Pro tip: Ensuring that your team is efficient and pulling its weight is key. If you discover C players, either elevate them to increase productivity or cut the cord. Unproductive and inefficient employees cost companies more money than you realize.
5. Understand your margins
Have you examined your gross margin from each client or by each product or revenue line recently? If 20 percent of sales are grossing a 5 percent margin, 70 percent are grossing a 30 percent margin, and 10 percent are grossing a 50 percent margin, which sector should you focus on growing? Clearly, you'd want to expand the 10 percent of sales that gross the most. The same goes for products.
Pro tip: Knowing your ideal margin and benchmarking across the board will help you evaluate which products or services to increase or reduce. You may need to raise prices or decrease costs on products that aren't netting enough. Justifying your cost of goods sold based on the product or service you're selling is crucial to increasing overall profits.
6. Consider actual savings
It's easy to implement a blanket policy of cutting costs across the board or always choosing the cheapest provider, but sometimes paying a premium price is a better idea based on quality, longevity and value. Our company depends on employees visiting clients as much as possible, so we pay for the best cloud services and related timekeeping tools that enable them to communicate remotely and effectively. Curtailing expenses on these services could result in poor access, poor storage or poor customer service, which would be detrimental to the business overall.
Pro tip: You usually get what you pay for, so there are likely occasions when premium services are the ideal option.