Improve Short-Term Profitability By Reducing Your Costs

When you are attempting to sell your company, one of the first things you probably thought about was how to show my company value. Value is not always cut and dried, but most potential buyers want to know what the profitability picture looks like. Even if you have had a bad quarter or two, there are ways to reduce short-term costs that can improve your company’s profitability to make it more desirable in the current market.

Labor Costs

Labor costs and the associated payouts, which include employee insurance and pension programs, are one of the most obvious cuts to make. Unfortunately, they are also some of the most difficult. No one wants to be the bad guy who makes layoffs. However, removing some people from a stagnating work force can make enough difference in your quarter-by-quarter profitability to justify the decision. Not only will this improve your direct labor costs, but it can also add to your dollars generated per employee and dollars per square foot, another important factor in selling your business. In addition, it can reduce indirect costs, such as those costs associated with employee health benefits and 401K matching. If many of your employees are hourly, you might be able to reduce these same costs by reducing hours but increasing shifts worked. While many of these strategies can reduce costs, it is important that you don’t irritate your employees so much that they quit. After all, hiring people is expensive and high employee turnover can be a bad sign for prospective buyers.

Overhead Costs

Energy costs are often some of the most crippling cost any business will face. If you haven’t already, focus on reducing things like electricity costs. If you do not have 24-hour production, there is no reason why the lights have to stay on for 24 hours a day, though many factories keep lights on as a theft deterrent. In reality, a tall fence and security lighting is far more effective than leaving on a bunch of lights. Focusing on reducing waste and improving the amount of recycling you do can be beneficial for two reasons. Increasing recycling can reduce the amount of trash you take to the landfill and, in turn, reduce your trash costs. Doing more recycling will help your business improve in the eyes of buyers who are seeking a “greener” business opportunity, simultaneously creating value and reducing your costs.

As you work to reduce costs, keep in mind that some cuts are actually more expensive than they appear on the surface. Pay special attention to employee needs; you want to cut costs in the short-term to improve your financial statements, not cause your employees to go on strike or leave the workforce. Most business will focus on adding things to improve the value of their balance, when in reality, less is sometimes more. Careful attention can reduce costs will increasing things like implicit value.