Controlling Costs Part 1 General and Administration Expenses

Already it is clear to me through the results of my simple online poll that controlling costs is a problem for many of us. Each coffee business is different and has different COGS and payroll challenges which are both difficult to alter significantly without affecting quality. But our General and Administration Expenses contain many areas where a sharp pencil can save a business plenty of money without any change in the quality of your products. For this post, refer to the Sample Income Statement Page.

*I want to make the importance of this clear by providing you with an example.
Let's say our company achieves a Net Profit before taxes of 10% of gross sales.
Let's also say that through this exercise of identifying savings in the G&A expenses we can save $20,000 per year. That means that our company would need to sell an extra $200,000 in order to achieve the same profit level had we not reduced G&A costs. Think about how hard it is to increase sales at a cafe by $200k. Now think about how easy it is to reduce how much you are paying for advertising, legals and phone bills.

"It is easier to save a dollar than it is to make one."

Accounting and Legal are areas which should be relatively stable unless the company is either engaged in a lawsuit, seeking a trademark, purchasing/opening a new location, or otherwise making many visits to their lawyer. If you must engage a lawyer, it has been my experience that conducting as much negotiation as possible without a lawyer, nailing all details with a caveat that they be reviewed by a lawyer saves significant costs. Also, when negotiating a lease or any other contract, insist that the landlord provide the lease document rather than paying for your lawyer to provide one. That way you can simply pay your lawyer to pick apart the document and remove what you object to.
Don't touch the money you spend on Accounting. These numbers are the tools you need to improve your business. Make sure your accountant is providing you with monthly, quarterly and yearly financials, and meet regularly with them to discuss goals and measure results.

Advertising and Promotions is an area where it is easy to overspend and under deliver on results. Making use of free online marketing is an excellent way of eliminating these expenses almost entirely. Twitter, Facebook, Foursquare, and an excellent blog or website are effective ways of advertising your company, and given effective data management, emails targeted to existing customers also work. If you are having a difficult time managing cash flow, consider eliminating advertising completely at least until you get things under control.

Reducing Amortization Expense and Equipment Lease charges require more long term planning, but reading my previous post about Investing in Equipment will help keep you out of trouble. This is where a lot of gold is kept, and spent needlessly chasing status from machinery. Overspending on equipment is a dangerous path which imperils profitability in the long term.

Targeting insurance, internet, telephone, paper and mobile providers in a systematic way can yield immediate results and save a company plenty per month. This is where most of the accessible savings are to be found. I used to play a game with our office staff, whereby I would identify costs which didn't affect quality and post them on a white board for all to see. The game was whether we could reduce the cost of every listed item over the course of the year. This all happened in our spare time and people become rightly proud of deals they secured on the company's behalf.

Rent is impossible to address unless you have a very understanding landlord. When you negotiate a lease, it is like taking on a car loan, with specific terms attached. It is unlikely your landlord will open up a lease and renegotiate it unless you are near bankruptcy. The time to think about the lease is when you sign it. Going into negotiations with realistic expectations of revenue, and a target of spending 10-12% of gross revenue on rent should set your target price and eliminate the need to renegotiate.

Repair and Maintenance is a difficult one to cut over the long term since not maintaining equipment will eventually lead to higher Capital Asset costs. I would not recommend cutting maintenance budgets. A better strategy is to maintain a proper training program for staff that helps keep machinery in tip top condition and gives them a sense of ownership of the equipment. Training staff is also a method of increasing professionalism which translates into happy customers. If a business can rely on quality staff to attract customers rather than gimmicks, give aways, and flashy equipment, they have put themselves in a competitive position which will be difficult to displace.
Travel and Entertainment is a luxury item, and can be easily cut or eliminated all together. Just because you own a business does not mean you own a successful business. Travel is completely discretionary, and should only be expensed if entirely necessary to a critical part of your business.

The last thing to remember is we are all in this business for the long haul. Thinking you have to make loads of money immediately is unrealistic, instead constantly tweak your business and find your financial groove. The changes I am suggesting will not result in an immediate $20,000 in your bank account, but over the course of a year you can easily save $20,000 by making wise decisions and paying attention to G&A. I know what I'll be doing in 20 years, working my business and figuring out ways to improve it. If you have a firm grasp of your costs, produce a great product, and have developed a community around your coffee shop, you will provide an excellent income for yourself and family for a great long time.