Profit First: Get Profitable by Cutting Expenses

[Pesso]

Hey Square Readers,

As we’re getting deeper into reading Profit First by Mike Michalowicz, let’s get deeper into the material. So far we’ve talked about profit basics, the principles and first action steps, ran an instant assessment and figured out our savings goal percentages, all to start ensuring that your business becomes truly profitable. 

Today, we’ll talk about how to actually start cutting expenses in order to reach profitability.

Cut Expenses 

When we laid out the core principles of Profit First, the author explains the concept of spending matching funding. That the more money you have in your account, naturally you’ll spend more. And the contrary is true, that you’ll make things work, get more creative, and still be able to afford everything you need, even if you have less money for expenses. The plan of cutting expenses is to run your business based on what you can afford today.  

He writes, “Cutting expenses is generally a very quick process and is usually very easy. From all the businesses I have met, it is pretty easy for most of them to cut 10 to 20 percent of expenses overnight, such as frivolous costs like unused recurring membership fees, office space that impresses no one, that expensive car that is “justified” because it is an expense, and perhaps even extra staff who aren’t helping your cause much. Cutting unnecessary expenses might bring you some psychological pain, but it’s a whole lot easier than trying to conjure new sales out of nothing.”

He suggests making a list of all of your recurring expenses, and then cutting 10% of them. Whether it’s completely getting rid of some of them, or working to lower the costs, doing your best to lower your expenses by as much as possible (without sacrificing quality) is tremendously important to making sure your business is profitable.

You can lower your expenses by discontinuing some product or service offerings, canceling unnecessary expenses, finding alternative items or vendors, negotiating prices and rates, and otherwise getting creative to become more efficient and lower your costs.

He writes, “Efficiency increases your profit margins … on each product or service you offer … without the need for increased sales… Look at every aspect of your business and determine how to get two times the results with half the effort.”

The Benefits of Rhythm

Enforcing a Rhythm is the 4th main principle of Profit First, and following the twice a month method can help with cutting expenses too, by making patterns more apparent.

Michaelowicz writes, “I realized that I had many ‘small’ recurring bills that added up to a lot of money and were unnecessary expenses. I started to see trends, and understand my cash flow. I didn’t start to stack bills, paying what I could and then putting the ones I didn’t pay back in a stack. I started to manage bills and cancel unnecessary stuff. I started to pay bills on time. Every bill.”

We’d love to hear your answer in the comments:

• What are some easy wins that you can cut expenses in your business?
• What are some more creative and innovative ways you can cut expenses?
• By how much could each of these help increase your profit?

Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!

View and Subscribe to all threads about this book.

RSVP to our Live Discussion on Tuesday, February 27th

Happy reading,

Pesso

[PartyManiaMD]

I've worked for billion dollar corporations, I've owned my own business. I never will ever condone or read anything by anyone claiming employees are a business expense even if that is technically true.

Treat your employees as assets, not expenses.

The writer of the book might mean well but this toxicity is extremely prevalent in the business world and when I was in corporate I had to fight tooth and nail FOR my employees because they're people.

All of these technology companies that are cutting labor in order to boost short term profits are shooting themselves in the foot because frankly companies like META make billions IN profit after all expenses including payroll costs are accounted for. They could literally cut ZERO people and still be extremely profitable without cutting their most important assets.

Cutting expenses is about looking at your overall business and understanding the core product and how to make things more efficient; cutting your staff or dropping services you provide because they're not "AS" profitable as your core product is not the right move because it leads to the company being a shell of what it was.

Whenever I see asset light strategies I see imminent doom for a corporation that became a titan of industry by providing a better product and service and when you start going the asset light strategy it is for short term profit, not long term sustainability.

TL;DR? People are assets, not an expense to be treated like a line item on expense reports.

[DinaLRosenberg]

I agree with every single thing you've said here.

We have a disease in this country thanks in part due to quarterly earnings reports and the insistence of ridiculous shareholder value that if you can't sell your product you cut your labor force. UPS laying off 12,000 workers.. yet we has a society are sending more packages than ever before!

This is self fulfilling.. you cannot make money if you don't have labor. We- as a society of workers- have become the most productive we have ever been. With technology. With AI.. yet it isn't ever enough profit.

We pay ourselves.

We have a 401k

We have employees that have been with us for 2 and 3 years (which is worth WAY more than 10% off the top which the author suggests).

This advise is akin to "if you stop buying Starbucks every day you can buy a house".. Maybe we'd have more money but it would literally suck the joy outta life..

[PartyManiaMD]

Did you see Meta cut 10,000+ jobs this year to save money? They just announced a $0.50 stock dividend.

2,576,000,000 shares x $0.50 = 1,288,000,000 in payments to stock holders.

Any company that pulls stunts like this needs to be blacklisted by responsible long-term investors, they're cutting their assets in order to give short term profits to investors. 

When I was in corporate I worked for several of the Top 100 companies to work for and I watched vulture capitalists swoop in and preach asset light strategies. They sell all of their land and assets and then the activist "investors" suck out as much profit as possible before walking away.

[DinaLRosenberg]

It's disgusting.. I certainly didn't get into business for myself to perpetuate that type of ridiculous culture.

[Pesso]

Thanks for sharing these thoughts, @PartyManiaMD & @DinaLRosenberg and calling this out.

I definitely agree that employees are absolutely an asset and not an expense, and should be a separate conversation from cutting expenses. Employees make our businesses what they are, and being an employer is a massive responsibility. They can be as much of what makes us successful as the products and services we offer. 

I believe in doing whatever we can to preserve employees, training and coaching them as needed, and cutting anything else we can to run things more responsibly. 

I'd love to hear from y'all on how you've cut actual expenses in your businesses, too.

[DinaLRosenberg]

I'm really bratty about expenses.. because we're not about dollar amounts but value. 

For example: internet

We have two main internet providers available to us- Verizon and Altice. Both are sorta crappy.. but we've found based on experience that Verizon had a more stable network. 

We started off with Altice and had them for about 3 years and the constant outages and slow speeds were just annoying. We would up switching and we spend more but we haven't had one outage since.

Altice comes in all the time. We'd likely save $150 a month. They make all these promises.. BUT how much would we save with outages? That's the issue- it isn't about the money- it's about the service/value.

Sure- we don't wanna spend money and not get anything out of it- but sometimes these decisions to save a little have long-term (and more expensive) results in the future.

[Pesso]

That's such a great example and point, @DinaLRosenberg ! Sometimes a cheaper option could have other kinds of costs in the long run, and definitely a great thing for folks to keep in mind as they're looking to cut expenses. Thank you!!

[Candlestore]

Back in December as I saw our Xmas sales were not back to what they were a few years ago, I was looking at ways to save $.  Internet was one I was already at the slower speeds for Business internet in my area, which was still double the cost for slower speeds than my home internet through the same company.  I ended up seeing a special from my cell company for an internet connection through 5G.  So I tried it.  My monthly cost went from $75 to $50 for the internet, PLUS my speeds went from 50MB to 200 MB uploads, downloads went from 12 Mbs to 50 Mbs.  Now again to check emails and online orders or to upload a picture or two to a web page I do not need the fastest internet out there but I was happy I saved $$ and got faster speeds, a win win for me.  Also since starting to replace lights in here from the fluorescent light tubes to led light tubes my electric bill has gone up less then others around me.  The bulbs cost more up front but got to look at the big picture.  I had a customer come in to pick up an order, asked who I get my glass from for candles?  He said we are in the packaging industry maybe we can beat their prices.  So I took a card and contacted them to see about pricing, you never know where an oportunity for possible savings may come from.  .10 off of a jar, x 1440 jars per pallet adds up.  I also calculate price after the cost of shipping to my door.  I have a few vendors that their price is higher by the piece but they have free shipping, the cheaper by the piece price vendors charge for shipping.  Or some offer spend X to get Free shipping, if it is something we use regularly or we might be close on something from that vendor we add it in for the free shipping.  My partner is like we do not need that this week, but will we need it in 3 weeks?  It does not go bad or spoil, so what is the harm to get it now to save $150 in the shipping fee?  Which we also negotiate with some suppliers.  Shipping when ordering through their store might be based on UPS or FedEx deliveries in boxes, so we ask what is price to ship it by LTL?  So we get a pallet of 14 cases of different items on a pallet for $150 compared to 14 boxes shipped from GA at $20 a box for example.

There are ways to save without cutting employees too.

[Pesso]

Thanks so much for sharing all of this, @Candlestore !

I love it when you can make a changes like that to not only cut costs but also improve the quality of what you're getting, and makes your business smoother to run. 

Good call on taking the step to invest in new bulbs! Spending a bit more now but saving in the long run is a great investment. 

Love that sourcing a new vendor helped you so much too -- little savings add up for sure!

Very cool on saving by buying a bit more too. We did that a lot too, but sometimes fell into the trap of having too much money held up in inventory, so it's definitely a delicate balance!

Rooting for ya, and would love to hear anything else you come up with-

[DinaLRosenberg]

it is SO IMPORTANT to keep these points in mind when purchasing. 

We have specific book reps we purchase with because we usually get an additional 2-5% off and free freight (which for books is huge).. so I love your advice! Spot on!

[BofBArtStudio]

I was fortunate to see Mike speak at our annual convention back in 2018.  He was one of the keynote speakers.  We all received his book during that event.  

[Pesso]

Ah that's so cool, @BofBArtStudio ! 

What did you get out of the speech?

Have you read the book too?

[BofBArtStudio]

I have read the book and he was a very good speaker.  He was quite engaging and memorable.

The profit first concepts are easy to understand and implement.  

I have taking SOME of the concepts into how we do things.  Between his ideas and those from other books, I have a hybrid method of taking care of the money side of business.

[Pesso]

Nice, @BofBArtStudio ! Which elements have you implemented and which did you skip?

[BofBArtStudio]

We did all of the following...

• Cut expenses
• Eliminate debt
• Setting up separate bank accounts for payroll, general operating expenses, savings and owner draw.
• Cloning our best clients
• Letting go of dead weight
• Finding money in our business
• Developing a rythm

[Pesso]

I love it, thanks for sharing @BofBArtStudio !

How have all of those changes impacted your business? What are the benefits you've felt?

What expenses did you cut?

[BofBArtStudio]

By eliminating debt, we cut the very large interest expense line item, which made a huge difference.

Additionally there where many things that we didn't necessarily need or that were able to be accomplished with lesser amounts. For instance we had a communication app that we used across the team but it was very expensive and we found an alternative that actually works better for us and cost less.  Some automatic subscription items were cut.  We rearranged our back of the house processing area to create greater efficiency and therefore have less cost of labor for processing.

I spent a couple of years basically going through eliminating every debt by paying it off and not having it anymore and taking a fine tooth comb to the expenses in our monthly accounting and one-by-one eliminating them completely or finding alternatives.

In the end we were able to increase our profit by reducing our expenses by thousands per month.

Then by finding ways to clone our best customers and increase our revenues, the net net outcome of profit increased significantly.

Therefore the owners are able to be paid consistently and the expenses are all taken care of in systematic and manageable way.

[Pesso]

Well that is all just incredible, @BofBArtStudio ! Thank you so much for sharing all of this. There is so much value in the hard work y'all put into making that happen, and it's so inspiring to hear that it's possible and you've done it. 

Debt can absolutely be such a huge expense, and that's such a good point that cutting down on general expenses helps to pay off the debt, and then it's a double win once you're debt free! 

Those subscriptions are a great place to look, since it takes a lot to look through the systems you're using and think about making changes.

I'm so glad you were able to do all of this, and I know it's making your business a lot stronger! Congrats!