Surviving—and Profiting From—the Economy: Part 3, Cutting Costs

By Mark E. Battersby

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Surviving slow periods often means cutting costs. Profiting from slow periods means cutting non-essential costs and reducing other costs, without impairing the operation of your business.
 

Lost Opportunities

The “cost” of money is the amount of interest paid on borrowed money or the “lost opportunity” cost of the funds. That lost opportunity cost is the amount the business or the owners might have earned from investing or otherwise employing those funds. A beauty store business owner whose investments yield a ten percent return each year would be foolish to use those funds to refinance the mortgage on the business building, a mortgage on which the business is paying an interest rate of only five percent.
 

Labor

One of the largest expenses in any beauty store business is labor. Because of their close contact with employees, some owners and managers often ignore direct and indirect labor costs. They tend to think of these costs in terms of individuals rather than how they relate to profits in terms of dollars and cents.
      Thanks to sales forecasts, a beauty store business owner or manager knows when to expect seasonal slowdowns. Why not encourage employees to take vacations during periods when their services may not be needed? This policy will not actually cut costs, but it should help maximize the effectiveness of the workforce and ensure that those workers are available when sales eventually increase.
 

Discounts

Can your beauty store business benefit from offering your customers discounts? Can your business afford to pass up discounts offered by your suppliers?
      The principal disadvantage of offering discounts is the cost to the beauty products operation’s bottom-line profits arising from the loss of revenues. However, the cost of trade discounts must be weighed against the improved cash flow that can be expected. Also, do not overlook the impact on profits.
      As a rule, every beauty store should take advantage of discounts of one percent or more when offered by suppliers that require full payment within 30 days. If the supplier offers payment terms extending beyond 30 days, it may be more advantageous to skip the trade discount and delay payment until the full amount is due. Of course, in order to decide more precisely when to take a trade discount, the owner or manager must compare what would be earned by taking the discount to what it would cost to borrow money in order to have funds available to make an early payment to a supplier.
      A number of businesses have discovered that trade discounts and payment terms are negotiable. Some businesses realize significant savings by negotiating standard payment terms from 30 to 45 days. Others have encouraged suppliers who did not normally offer discounts to give one in return for immediate payment--or by paying less promptly when they did not.

Preventive Care

When a small-business owner applies for a loan, banks are usually wary of self-employment income because of the ability of individuals to manipulate such income. Likewise, individuals buying a business should be aware that a tax return is not a fair representation of the profitability of the operation. What’s more, yesterday’s figures may not be representative of profits or losses today or in the future.
      During seasonal highs and lows, you may see your cash balances fluctuate widely. The budget prepared for your beauty products operation will usually predict when sales, costs and profit levels are expected to be highest as well as when they will be at their lowest. That same budgeting and forecasting process makes it possible to effectively shop for economical financing well before needed, or before it becomes a question of borrow at any price just to survive. One attractive option is a guaranteed line of credit.
      With an established line of credit, the operation's bank agrees to lend an amount of money up to a certain limit on an "as needed" basis. Interest is paid only on those funds that are actually borrowed, although most banks charge a minimal monthly fee for earmarking funds for your beauty store business’s possible future use.
      The U.S. Small Business Administration (SBA) offers a similar program to help businesses survive slow periods. Their program offers short-term loans to help small businesses get past cash crunches that are usually attributable to seasonal changes in business volume. The loans are SBA-guaranteed, which results in lower interest rates or, in today’s economy, financing that might not exist otherwise.
      By evaluating and reducing expenses while increasing sales, it is possible to survive and profit in our current economic climate. Whether a slow period results from the economy, from competition or from other sources outside the control of the business owner or manager, it’s never too late to employ “slow period survival strategies” in your beauty store business.

Mark E. Battersby is a freelance writer based in Ardmore, PA.

Go to the previous web exclusive article on Surviving—and Profiting From—the Economy: Part 2