Flow-On Effect of Cutting Business Expenses

Flow on Effect of Cutting Business Expenses | Glint Accountants

Flow-On Effect of Cutting Business Expenses

One question virtual CFO’s are often asked is: How may I improve the profit?

What’s obvious to most clients is to increase revenue. That is one side of the equation and definitely an important one which should not be downplayed. The whole idea of being in business is to be able to generate revenue. The concept of growing wealth relies on this basic premise of being able to increase revenue.

However, there is another important aspect that must not be overlooked – keeping a tight lid on expenses. For example, rental expenses may be reduced by moving to smaller premises or a less costly location. Other expenses may be reduced by negotiating with suppliers for lower rates.

Here’s a simple illustration of the flow-on effect of reducing business expenses.

In order to have sufficient funds to pay rental expenses of $100K, a business needs a gross profit of at least $100K to break-even.

If the business has a gross profit margin of 10%, that means the business needs to earn sales of $1 million after incurring cost of sales of $900K, which will generate gross profit of $100K to pay for rental expenses.

If rental expenses are reduced to $80K, it means the business now has $20K in additional profit for $1 million of sales. Or it could translate to being able to stomach a $200K reduction in sales from $1 million to $800K during a downturn.

Disclaimer: This is a simple illustration for the purposes of this blog post, which does not take into consideration other overheads such as wages for sales staff. A reduction in sales without a corresponding reduction in the wage bill for sales staff is an issue which needs to be addressed. Our virtual CFO services will involve an in-depth analysis of your business operations, including taking a holistic view across all processes involving sales, direct and indirect costs. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.

Geraldine Lee, Glint Accountants

Geraldine Lee is Fellow of CPA Australia and virtual CFO at Glint Accountants. Contact us for vCFO services and assistance if your business requires a profitability analysis to weather the economic crisis. We walk alongside you to get you and your business through the storm.

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