How many times have you looked at your bottom line and you were shocked and amazed? You thought to yourself “where did the money go?”
Well trust me when I tell you, you are not alone. Every year millions of businesses, large and small, have this happen to them. How do you prevent it you ask? By conducting a Cost Audit. I conduct a Cost Audit in our company twice a year – six months into the year and during budget season. And I recommend you do the same.
Conducting a Cost Audit simply means setting aside the time to sit and take a hard look at your numbers. You should first evaluate how you are doing so far during the year compared to your budget and goals. Are you on track to meet your goals or do you need to make some forecasting adjustments. Forecast adjustments are when you make changes to the future months to either increase the budget in those months to still hit your goal, or decrease your budget to account for not being able to meet your goals.
Once you have made these adjustments, you then start the Cost Audit by analyzing all of your costs one by one and asking yourself these four questions:
- Do I really NEED this expense?
- What is my ROI on this expense?
- Is there a LESS EXPENSIVE alternative for this expense?
- Can I CUT this expense all together?
Ask yourself do you really, truly need this expense. Is it necessary for the success of your business or could you do without it? Think about the gym membership. In January, you sign up to go to the gym and by March you have stopped going. Maybe you started working out form home instead and forgot about the membership. Either way you are paying for a service you no longer use or need.
Once you have identified that you need it, determine if you are getting a return on your investment from it. Or are you simply paying it in hopes that you will get a benefit from it – one day? That’s your ROI. Don’t get stuck in the “what if” phase. That’s when you find yourself saying “what if the benefit comes next week”. If you have been saying that for more than six months, it’s time to re-evaluate this expense.
If you determine that you are getting an ROI on this expense, is it the ROI you anticipated? If it’s not then it’s time to put on your inspector gadget hat and do some research. What other companies offer the same or similar product or service at a price that will yield you the ROI you want? There are at least ten companies that provide products and services for everything you spend money on in your business. You just have to find the one that works best for you. Keep in mind you may have to compromise a few benefits, and you may not, so make sure you determine the absolute must have features first.
Thinking back to the need question, if you determine you no longer need that cost than the only option is to cut the expense. Reducing the cost entirely is always the best option but as I mentioned above it’s not always the necessary or available option. But if you can do it, you will definitely increase your bottom line and your cash flow.