Mistakes I Made #7 – Not Understanding That Reducing Expenses Can Be 10x More Profitable Than Increasing Revenue 10x. Really.

One of the mistakes I made in the early years of my business, was chasing money. Yes, the thing we refer to as revenue or profits, was all I could think about. It consumed my every thought.

I would pretty much do anything to get that extra sale, including giving away discounts, doing deals, working extra, and paying staff overtime.

I can’t help but remember the British expression of being “penny wise and pound foolish”, and I was.

But thankfully with experience comes wisdom, therefore I soon stopped caring about increasing sales when I realized the power of reducing my business expenses (costs).

Let me explain…

The Story.

Let’s assume you’re like me and you’ve got a million bucks in sales every year. We’ll call that revenue.

And let’s also assume you’re like me and you’ve got $800,000 in outgoing costs such as wages, rent and so on. We’ll call that expenses.

The Math is simple; $1,000,000 less $800,000 equals $200,000 in profit.

So, I woke up one day and said to myself, my goal is to increase my sales by 20%. But in order to do that, I had to give away a 20% discount or run a 20% off sale or something to the like.

And this is how it turned out (You may be a little surprised here):

When all was said and done the 20% discount worked a treat for me and we made our $1,200,000 target. Yay!

Here comes the big BUT, I had to give a discount of 20% on the extra $200,000 to reach the target.

Naturally our expenses increased because we needed more man power, and we needed a bit more stock. So instead of having an $800,000 expense bill, it came to $960,000.

Here’s how the numbers played out:

Revenue with the extra I sold = $1,200,000
Less the Discount I had to give = – $40,000
Less the usual Expenses = – $800,000
Less the extra expenses I had = – $160,000

So, I calculated my new profit margin and much to my disappointment it was $200,000.

Exactly the same! But wait a second, how could that be? I busted my arse, got all those extra sales, all to not turn a higher profit?

I had to know where I went wrong, and being a natural born problem solver, I did my own little investigation.

It turns out, because of the amount I gave away in discounts, a measly 20%, and the amount of increased costs I incurred, and my usual profit margin only being 20% of what we bring in, all we did was break even to our average annual target.

So basically, we did all that extra work and it made absolutely no difference whatsoever. But we learn from our mistakes, and what came next was liquid gold.

I had to adjust my game plan, so the next year, I decided to focus my time and energy on saving 20% instead.

How did I do that, by looking at what we were spending and on what we were spending money and if it was truly necessary to operate the business.

I soon realized that a lot of things we were buying were redundant and unnecessary.

So we cut down on those expenses, I’m talking everything from buying cheaper toilet paper, cutting on stationary, negotiating with my suppliers, replacing certain staff with more efficient ones, closing an office and re-contracting our phones, internet and other things to get a better deal.

And here’s how that played out:
Because we were no longer doing deals or offering discounts, our revenue went back down to the $1,000,000 bucks.

We weren’t giving away any discounts so that doesn’t appear in the math. And because we skimped and saved, I managed to reduce my expenses by 20%. Genius!

Revenue back to what it was = $1,000,000
Expenses get reduced by 20% = $640,000
And profit goes up to = $360,000

Holy crap! The profit was almost double what it was before!

So again, I had to know how it happened.

For every $1 of sales that I made, I had 80 cents of expenses to pay so if focused my time on decreasing the expenses, this was the key to making more, a lot more, profit.

The moral of the story.

Look at what your business is spending, and never stop shopping for a good deal. Don’t be afraid to renegotiate contracts and deals with your suppliers and contractors each year end.

You can even go as far as adding these to the duties of your admin team or business manager if you don’t have time to do it yourself. But as you’ve seen it is totally worth it.

And, if you want to see how your numbers play out, click here to try my Sales or Expenses calculator. Its free and will most certainly set you up for success.