Increasing sales is an excellent way to increase profitability, but reducing costs is often equally-or even more-effective. David Cohen, president of Expense Reduction Group Inc., a cost reduction consulting company in Boca Raton, Florida, illustrates it this way: A company with a 10 percent net profit margin would have to generate $1 million in new sales to have the same impact on the bottom line that saving $100,000 in expenses does.
Cohen recommends taking a careful look at any item you purchase repeatedly. Expenses often overlooked are those raw materials that are not used for your ultimate product. "Do not reduce price by reducing quality or service levels," Cohen cautions. "Look for creative ways to bring costs down." Such creativity may include re-designing or re-engineering a particular item to achieve a lower cost with the same result, doing simple comparison shopping, consolidating suppliers for quantity discounts, or reducing freight costs by using local vendors.
Because it's easy to get complacent, Cohen recommends putting all your regular purchases out for bid at least once or twice a year. That not only keeps your vendors on their toes but also forces you to examine the products you're buying to make sure they're what you really need.