I recently was on a LinkedIn forum for CFO's and a question was raised, 'what has more bottom line teeth, revenues or expenses?' There were many great responses and feedback from seasoned financial officers but the consensus was that you have to address the impact of both and pursue a balanced approach.
There has been in the last few years an inclination to look only at reducing the expenses to increase the bottom line. Many large corporations have been looking at ways to continuously reduce costs. But you have to take a realistic look at your expenses. If your expenses are large or bloated then yes you will definitely need to review expenses to see where you can make improvements, but you don't want to cut into muscle and cripple your business. There are some expenses that are necessary for your business to exist. These fixed costs cannot go away or be made to disappear. Also each new client creates an incremental increase in operating costs, there is no way to increase revenue without a corresponding increase in expenses.
Financial officers always look to and try to contain costs because it is the part of the business that they understand and can control. Revenue is a product of sales and in larger organizations is handled by a sales team or a larger marketing organization.
But to manage both effectively you need information and analysis. What percent is your fixed costs and variable costs to your revenues? Is this percent consistent month to month? What is your revenue per client or product? How much of that revenue per product is going towards fixed costs and variable costs? Are your costs per product or client even with or higher than your revenue per product or client?
A pricing model can be critical because it forces one to account for fixed costs and the variable costs that you have for each client you service or widget you produce. Once you have this information it can also help to determine the minimum sales you need to break even. Any sales plan that goes below this will mean losses for the business. With knowledge of what the incremental cost per client or product is you can forecast out the increase in costs for each benchmark in sales. This lets you know what your max capacity is and at what sales level you would need invest in assets or equipment to take on more sales. As your sales increase make sure that your percent of expense to revenue stays consistent, wild or erratic changes in percentages should be reviewed.
As with all things, a balanced approach is the best way and constantly reviewing opportunities for improvements for both your revenues and expenses have the biggest bite to your bottom line.
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