Just like cholesterol, not all expenses are bad for you. And not all profits are good for you, either.
Despite the steady flow of news about consumers and small businesses cutting back on their expenses, not all small businesses are thinking smaller.
And it’s not even true that everyone is simply cutting expenses. A lot of people are reallocating their expenses to be more effective. And that means opportunity for you to do the same and make your business healthier.
First, let’s talk about your expenses.
You should be sure you are spending effectively on things that make a difference to your customers. And it may be that you should be spending more, not less, on certain things that make you more effective as a small business.
This may seem surprising, so let me explain.
Years ago, it was widely believed that all cholesterol was bad for you. But now we know that there is good cholesterol and bad cholesterol. Good cholesterol actually improves your health and must be present at a certain level. Cutting good cholesterol is just as bad for you as increasing bad cholesterol.
Like cholesterol, there are good and bad expenses for your small business. And you can improve your small business “fitness” by increasing good expenses and reducing bad expenses.
The first step is to divide your expenses into three groups: good, bad, and essential.
On the good expenses list, include all expenses that increase your productivity, such as online services (generally more efficient), your laptop (makes work portable and efficient), and your internet access (essential for doing your research and communicating). Include those expenses that attract more customers at an acceptable cost, strengthen your ongoing customer relationships, and retain employees in whom you have invested time and training. And add those expenses that are important to the quality of your products and services. For this list, the real questions are 1) Are there opportunities to switch to more efficient, lower cost providers of key products and services, at the same or higher level of quality?; and 2) Are you actually spending enough on these good expenses?
If you blindly cut good expenses in an attempt to cut back everywhere, you may hurt your business. In particular, since so many people are switching, you should be careful not to stop investing in new customer acquisition. Maybe your old techniques are no longer working, but if you become invisible to new customers, you’ll miss out on the switchers who might choose you.
On the bad expenses list, include those expenses that have little or no effect on: company productivity or your ability to operate your business successfully; the quality of your products and services; your ability to attract or retain customers; or employee performance, retention and morale. Expenses that have no effect on these important areas can generally be cut significantly without hurting your business.
On the essential expenses list, include the remaining items that cannot be avoided. Many of these can be reduced, but they cannot be eliminated entirely or your business cannot function. Rent, phone, utilities, transport and general infrastructure costs are usually in this category. There may be some switching opportunities here. There are even some businesses that have discovered that they can reduce the expense of a physical location by bringing their service to their customers while maintaining a web presence for active customer communication. But your physical location may serve as an important reminder that you exist, so be careful about this.
The second important step in reaching small business “fitness” is to look for bad profits that might be hiding in your income stream. In the same way that there are good expenses and bad expenses, there are also good profits and bad profits. Bad profits come from choices that take advantage of your customers, ultimately drive them away, and thereby undermine your business. These include things like excessive late fees, substituting poor quality materials, overcharging for services and parts, and other gotchas of one kind or another.
While these bad profits may appear to be attractive in the short term, especially when profits are hard to come by, they anger your customers and erode your customer base in the long term. Ask yourself this question: Do you love your bank, credit card company, cable company and cell phone company? If not, it’s probably because they have all become addicted to bad profits. Don’t do to your customers the same things these companies do to drive you away, with their endless extra fees for stepping over one line or another. If you don’t like these small-minded practices, chances are your customers won’t like them either.
By going through the process of thoughtfully increasing good expenses, cutting bad expenses, and eliminating bad profits, you can improve your level of small business “fitness”, and you may soon begin to see positive results.
In the long run, small business “fitness” is just like physical fitness. You have to work at it regularly to keep your business in shape. Bad expenses and bad profits will reappear over time, and you have to actively keep them under control to keep your business healthy.
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