Sign in

Examining Critical and Essential Expenses

Anthony Silvestri May 2011 issue of Skin Inc. magazine

In today’s economy with increasing expenses, high unemployment and turnaround uncertainty, all businesses are looking for ways to cut expenses. However, even in a good economy, improving your sales-to-expense ratio is critical for long-term success, enabling you to weather present and future financial storms.

A firm understanding

The first step in establishing cost-cutting measures is to have a firm understanding of your spa’s finances. Preparing a monthly, quarterly and yearly cost-of-operations and revenue report will let you see exactly where your revenue is being spent by expense type. Leave nothing out of this report; the more detailed the better.

Hone in on critical and essential expenses, and search for room to reduce them. Set expense-reduction goals, then seek out methods for reduction.

Critical. These are expenses that cannot be eliminated and are essential to operations, such as rent, utilities, communications and salaries. Even though they can’t be eliminated, there are ways to reduce or contain them. Examples of critical expense reductions include the following:

  • Re-negotiate your rent payment or ask for lower lease payments in exchange for extending the time term. You are in the driver’s seat. The economy has created openings in properties that cannot be filled. If your landlord or bank won’t negotiate, then consider moving your business. Landlords are giving medium- to long-term deals and incentives that can cut as much as half of your monthly rent.
  • Utilities are some of the more controllable costs your business will pay. Do not use electricity when not needed, regulate the temperature, reduce water waste, and contest estimated gas and electric bills, having the companies take actual readings. The most important part of controlling utilities is setting a policy for conservation—communicate this with your team members and get their cooperation.
  • Discuss getting concessions with your local government on water and utility bills. Keeping your business in its community is leverage you should use.
  • Instead of hiring additional staff, make sure you are utilizing the present team to its full capacity. Try distributing tasks among the existing staff. Cost-cutting measures can be unpopular; however, when faced with the reality that their prosperity may depend on it, they will likely play along.

Essential. These are supplies that have a direct effect on services; without them, services can’t be performed. Reductions here can be found in controlling waste and eliminating unprofitable products or services, thus saving money.

Examples of essential expense reductions include the following:

  • Reduce, eliminate or change services that are not profitable.
  • Get competitive bids from various suppliers and let them know you are shopping around. This will trigger a competitive nature and produce the lowest costs for goods.
  • Reduce waste in products used.
  • Lease or buy used equipment with performance guarantees.
  • Work with suppliers that will provide small minimum orders and rapid delivery when needed.
  • Take advantage of sales and incentives to lower the cost of goods.

Establish the right atmosphere

Cost-cutting begins with the owner. If you are frugal with your spending, then you will establish the right atmosphere and change your business’s culture. People follow leaders.

Anthony Silvestri worked for Mario Tricoci for several years in many positions—most recently as operations coordinator. Before this position, he was a general manager and the management training coordinator for the company. One of Silvestri’s specialties is how to control operating income and controllable profit lines on profit and loss statements. He is currently the COO for Sella All Natural Skincare.