Simple Strategies To Reduce Expenses

July 16, 2004
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[Editor's note: Welcome to the seventh installment of "Money Talks." At least once each month, Terry Nicholson, president of AirTime 500, will provide business management information, all with the aim of helping contractors, as he put it, "make money every day."]

Factor No. 1 in our series was pricing for prosperity, which meant knowing your costs of doing business. Knowing those costs will help you set the prices you need to prosper, and an important part of that prosperity is managing your expenses.

First, you have to know what your expenses are. A simple formula for a successful business is to bring in more money than you send out. With that in mind, let's go to work on managing your expenses so you can keep more of the money you bring in.

Lose The Fat

Start by looking at how much everything in your business costs. How much do you spend on insurance? How much do you spend on equipment? How much do you spend on Yellow Pages and marketing?

Once you know your expenses, you can go to work on reducing them and increasing your profit. Let's tackle a few of your major expenses with some expense reducers.

Buy right. One of your largest expenses in HVAC is the equipment itself. Obviously, you can't get rid of this expense, but you can work to control it. Reducing this expense means buying right. Some contractors do this by joining buying groups to pool the buying clout of hundreds of contractors and buy at prices like the big box retailers and consolidators do.

In our own organization, AirTime 500, many members receive discounts and rebates so large that they actually get paid to be a member. It's money they wouldn't have made without the group. Last year alone, our organization paid out over $1 million in rebates. How much are you overpaying on equipment by ignoring these types of buying groups that exist?

You can start reducing this expense on your own, though, by taking advantage of discounts when you buy your equipment. For instance, does your supplier offer discounts on equipment if you pay your invoice in a timely manner?

Paying in a timely manner, though, means having the cash on hand to do so, which means your cash flow can't be tied up in accounts receivables.

Remember the motto: "Get paid today." This way, you'll have the cash available to take advantage of these discounts.

Shop around. As a business owner, you know the necessary evils needed to run a business, like insurance. Insurance rates seem to go up each year, even if your coverage goes down. However, the need for it has never been higher. Today, you must have insurance before you even open your doors. So, to save money on this necessary evil, you have to shop around.

Don't be afraid to look elsewhere. Changing insurance companies can be a long and difficult process, but in the end, it can be worth it. Insurance companies understand the difficulty of switching, which is why some will, in essence, "buy" your business the first year, only to raise your rates substantially the next year, knowing you won't want to go through the process of switching again. If you're willing to go through the process, however, you can make a lot of money.

What if you saved $10,000? A company operating at 5-percent profitability would have to generate $200,000 in additional revenue to create that same $10,000 of profit. That's why investing the time to shop for insurance is so crucial. Even if you don't save this year, looking every year may keep your insurance from increasing in the future.

Do what works. As you stare at your expenses, one big number probably stares back at you - your marketing expense. What is that huge expense really bringing you? Is it worth it?

Start with your Yellow Pages. How many books are you in? Are they bringing in calls? To reduce this expense, track the number of calls each ad brings in and compare the results. Then, stop what isn't working. Chances are, at least one phone book isn't pulling its weight, but you'll never know unless you track it. Put your money in the cost-effective books and take it out of those not creating results.

The same goes for the rest of your marketing. Track the results, and stop doing what doesn't work.

These simple strategies can reduce your expenses, but this is only a start. If you can reduce your expenses, you'll boost your profits, which will help you make money every day. And that is the goal, isn't it?

Next installment: The most important aspect of your company is your people. They are the ones who give your company life and create its success. Without a team that possesses these traits, you'll have a hard time reaching the top.

Nicholson is president of AirTime 500. For more information on AirTime 500, call 800-505-8885. Nicholson can be reached by e-mail at tnicholson@venvestinc.com.

Publication date: 07/19/2004

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