Important and Discretionary Expenses

In order to realize and maintain financial success in your skin care business, it is crucial to examine your important and discretionary expenses, and search for room to reduce them. Set expense-reduction goals, then seek out methods for reduction. Based on the rank identifier and whether or not cuts can be implemented, you will start to see where cuts are possible.

Instead of looking at the amount of money spent for each type, convert it to a percentage of revenue earned. If you see that advertising equals 25% of the revenue earned, you can set a reduction in place by limiting advertising to 10–15% of revenue earned. Rank expenses as important or discretionary. Then, using the percentage identifier, calculate the percentage of spending for each type.

Expense ÷ revenue earned = expense percentage

With this complete, you can begin your analysis and set reduction goals by expense type and rank.

Important expenses. This includes products for retail sales, paid advertising, discount offers and free product samples.

Discretionary expenses. This includes items or services purchased simply because you want them or they are convenient.

Important expense reduction

  • Track product sales and focus efforts on profitable products or those with large inventory turns.
  • Liquidate products that aren’t selling by offering discounts, and don’t replace them.
  • Work with suppliers to reduce minimum orders, allowing you to keep less inventory on hand.
  • Consider replacing paid advertising with free advertising and social media marketing.
  • Create referral networks with customers and team members, or consider getting involved in joint advertising campaigns with other local businesses to share the costs.
  • Reduce the amount of discounts on products sold and educate your team about how to sell products based on benefits.
  • Reduce or eliminate free samples unless the supplier provides them to you for free.
  • Instead of discounts or posting a sale on services, provide a value-added service or product with a service ordered. This form of advertising almost always costs less than the discount given and is good public relations with future service potential.

Discretionary expense reduction questions

A few items that fall into the discretionary category are beverages for clients and staff, snacks, magazine subscriptions, cable television, printed brochures for handouts, association fees, chamber of commerce fees, donations, contributions, gifts and premium giveaways. Ask yourself the following questions about your discretionary expenses:

  • What do you buy now that is a discretionary item?
  • Why do you buy it?
  • Is it critical to client retention? To test this, stop providing the item and see if it is missed. You can always add it back.
  • Does it bring in a return-on-investment (ROI)? If not, why should you keep it?

Monthly review

Cost-cutting efforts should not be a one-time event. It is critical to review and adjust your plan monthly, enabling you to establish a pattern on spending throughout time, and identify the tools needed to contain or reduce costs.

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.

More in Finance