Cost And Effect

The Rest Of The Story

The 15 percent of sales consumed by taxes may seem high, but Egge says the survey results are in line with what larger businesses pay. And while you may not be able to escape taxes, there is probably plenty you can do to limit expenditures for other costs that, while smaller, are still important.

Facilities costs amounted to a little more than 2 percent of total sales, but they could be even lower if entrepreneurs took advantage of just-in-time inventory practices to minimize space required for inventory, says Gillis. Leasing space, practiced by just half the small businesses surveyed, is generally preferable to owning a building or other space, stresses Low.

Sometimes low costs may indicate a problem. The very low bad-debt ratio cited in the survey may be explained by the fact that small businesses tend to do mostly cash business, without extending credit to customers, says Egge. Many are retailers who offload all risk of nonpaying customers onto bank charge cards, he adds. However, low bad-debt ratios also suggest small businesses are stunting their own growth by turning away credit-worthy customers.

According to the survey, nine out of 10 small businesses carried some type of insurance, but insurance costs as a whole were small--less than 2 percent of revenues. However, White says the insurance savings she has realized by getting rid of all her employees has saved her considerable money. "I've cut down on the types of insurance I carry," she says.

Experts warn that entrepreneurs should be cautious when deciding where to cut costs. The figures reported for one major expense--sales and marketing--may actually represent underspending by small businesses. "Small businesses should advertise more," says Doescher. "Some don't advertise at all." In fact, the survey results showed that one in five small businesses does no advertising or promotion.

So where are they spending the 9 percent of annual sales devoted to sales and marketing? Print ads were used by most, while smaller numbers used direct mail, radio, television, telemarketing and billboards.

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Cost And Effect.

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