~by Haley Lynn Gray~
One of the simplest rules of business is that if you want to increase the money in your pocket, you have to follow a simple rule – increase sales or decrease expenses. It’s that easy. Or is it? Is it like dieting, where you need to eat less, and exercise more? Where it sounds deadly simple, but the reality is actually not so simple?
Let me see if I can explain. In business, there are expenses associated with increasing sales, otherwise known as the cost of goods sold, and overhead. There is a relatively fixed amount of overhead for many companies – things like rent and office staff. The things that don’t change much because they are fixed costs are generally called overhead.
Cost of goods sold is a bit more tricky to calculate, because you have to factor a little bit of the overhead into each unit sold. You also need to factor in things like the amount of time that an item spends in the warehouse, the cost of the item, marketing, materials, manufacturing, and the myriad of details that go into it. One thing I learned in Business School is that this is an art form, and not an exact science, so there are many ways to figure out the cost of goods sold, depending on what your goals are.
Where things start to get a bit dicey is when you start having to add overhead, or increase your client acquisition cost in order to get the next client. So, if you need to add extra office staff, increase your office size, or increase advertising, you increase your overhead, so the marginal cost of that next item sold increases dramatically. It’s those inflection points that can be killers. If you don’t watch for them when growing your business, suddenly you can have a lot less money in your pocket. You can actually be losing money instead because you can exceed income in so many tricky ways.
Of course, the easiest way is to just keep growing and manage costs carefully along the way, watching what the marginal costs are doing to your bottom line. So, go ahead and increase your sales, and decrease expenses where it makes common sense to do so. Your business will be healthier for it. But please don’t do any crazy cost-cutting measures that will drive everyone crazy!
Meet the Author: Haley Lynn Gray
Haley helps female entrepreneurs create a strategy plan for their businesses – so they can make enough money to spend quality time with their family, pay for their children’s dance lessons, pay bills – and not worry about where the next client is coming from.
Haley is a serial entrepreneur and founder of Leadership Girl. She helps other entrepreneurs build their businesses by sharing the benefits of her business education and experience through Business Coaching.
Whether you want to get a new business off the ground or expand an existing business, Haley can assist you.
Connect with Haley:
- Work with Haley: http://leadershipgirl.com/work-with-haley/
- Facebook Page: https://www.facebook.com/Leadershipgirl
- LinkedIn: https://www.linkedin.com/in/haleygray