There are two ways to increase profitability: generating more revenue or reducing expenses. Here are the first three places we look when we try to reduce and optimize business spending:

1. Advertising and Marketing Expenses

  •         This can be a black hole of spending with no guarantee of returns. Social media ads, outsourced calling centers, workshops, list building data, CRMs, etc… not to mention a sales and marketing team to manage these efforts. As a revenue producing team, this team and its resources can increase your growth curve and supercharge your revenue generation; however, without revenue growth, the combination of all these expenses can significantly increase your overhead and erode your profitability (I’ve seen the latter too many times).
  •        If your sales team isn’t producing a solid return on investment (what revenue have they generated vs. how much money have you spent/invested in that team / its resources), check out this decision tree and see where your key bottlenecks are (you may need some data to find the answers to this):

 

Some other thoughts and general rules of thumb:

On Advertising Agencies

  • If they charge you a % of advertising spend, be cautious. Their incentive is to
    spend more, not effectively.
  • Make sure you trust the individual that’s managing your account. Develop a good relationship. If there is a lot of turnover at the organization, that’s a red flag.
  • Can they tie their advertising / marketing work with your mission/vision/values, strategy, and value-add? If not, that’s a red flag as well.

General Thoughts

  • Practice unreasonable hospitality – you can’t achieve this just by spending more.
  • Justify your spending habits in sales / marketing. Is what you’re buying or spending on worth the impact it’s going to have?
  • Put yourself in the shoes of your customer – what’s going to make you interested in your product / service?

       2. Software and Subscriptions

  • Monthly subscriptions, 12-month contracts, and up-front payments. Eww. Most software isn’t incredibly expensive (although some are), but they add up quickly. One of the hardest things about software is that their low price point makes them easy to forget. While you (as the owner) may not use each software, we have found it very helpful to audit software expenses to verify which are critical, which are nice to have, and which are unnecessary.
  • In order to adequately monitor your software expenses, it often makes sense to identify renewal dates, cancellation terms, and importance to your organization in a spreadsheet or notes document. If things get tight (or if you want to expand margins/cut costs), you can either cancel your subscription, ask for additional discounts, or ask for extended terms.  

       3. Overtime

  • 1.5x.
  • Overtime stacks up quickly.
  • Plus, with new non-exempt employee rules, more of your employees will become eligible to receive overtime. Even though an hour or two of overtime may not seem like an obscene amount, it can become a massive burden on your business. Here’s an example:
  • A manufacturing company has 50 employees, 25 of which are exempt from overtime.  Let’s assume everyone makes $40K per year, with 15 working 1 hour of overtime per day (beginning in 2025, everyone making less than $43,888 / year is eligible for overtime). With an hourly rate of $19.23 / hour and overtime being paid at 1.5x, that manufacturing company’s overtime would be $2,163.38 / week ($112.5K / year). Relative to the whole company’s payroll, overtime would increase payroll by 5.3% If that manufacturing company is operating at slim profit margins, an increase in payroll like this would erode the remaining profitability they do have. Not good.
  • We find that most overtime costs come from operations departments dealing with fluctuating demand for products / services. Balancing a timely / quality delivery of products / services and minimizing overtime is asking a lot of an operations team. Here are some potential solutions to help reduce overtime while still having exceptional results:
    • Hire hourly contractors to support during high-demand times.
    • Have a well-maintained software that maximizes personnel utilization.
    • Document when demand is highest and consider changing shift schedules or hiring temporary work to support during that time.

      • Is it a time of day?
      • Day of the week?
      • Time of year?
    •  Tracking overtime on a weekly, bi-weekly, or monthly basis will help you find areas of potential improvement.
    • Create a correlation between less overtime and more compensation for employees.
      • If you have a profit-sharing, stock ownership plan, or bonus pool, make sure employees understand that less overtime = more profit = higher bonuses.

 

 

Cutting expenses, especially when it comes to people, is hard. Our goal is to help you brainstorm some ways you can reduce / eliminate expenses.

However, generating more revenue will typically fix a lot of your problems.