Lifesaver: If you don’t already have an accounting program, invest in one. Tracking expenses in a software program will speed monthly sales tax reporting and yearly tax filing. Further, it is easy to create clear reports of the business’s financial picture. If you are not comfortable with accounting, hire a bookkeeper or accountant to set up your accounts correctly.

      Take special care to review any bills that you don’t pay yourself. You may find that even your most trusted managers are not as concerned about your spending as you are. When we reviewed our expenses, we were shocked to discover how high some of our basic bills had escalated. For instance, our store manager was an authorized purchasing agent of the company and he had the authority to order inventory and some other items. He was special-ordering French Vanilla creamers for the staff break room. While this cost was only $40 each month, costs similar to this were adding up and costing our company hundreds of dollars a month. After completing our review, these unnecessary expenses were removed and the company overhead reduced.

      The first time you complete your review, you may find that your expenses exceed your income by an unexpected amount. When strong businesses start struggling, it is common for expenses to continue at record highs even when income is declining. Even Fortune 100 companies make this mistake.

      If you find that your business is in this situation, the first thing you need to do — before you start expanding your operations, increasing your sales, and saving your business — is to reduce your expenses. Review all the items again and determine what you can reduce or eliminate. Each dollar that is spent without income becomes a debt that your business will have to pay off later. By eliminating as many costs as possible, you reduce the business’s operating expenses and when sales start improving, you will become profitable much faster.

      1. What Is Your Real Monthly Revenue?

      Understanding your net revenue is one of the best ways to begin your financial review. Your net revenue is the gross revenue amount (i.e., the total of all of your sales) minus the cost of goods sold. The cost of your goods can include the cost of the products themselves, the costs of shipping the product, and any other costs for the goods or services you sold. This net revenue allows you to see how much money your business makes before the business expenses, such as overhead, salaries, benefits, and other items are paid. In order to understand where you can cut expenses, you must first understand how much money the company actually takes in on a monthly basis.

      If you have ever completed a budget for your business or use an accounting program, you will be able to easily find the net revenue for each month. Review these numbers for the last year. What you will probably see is that your monthly net revenue has varied significantly over the last 12 months. Business cycles, vacation periods, and increases in costs all affect the net revenue. In some months your business may have been profitable, in other months, your business may have lost money.

      Since you are trying to complete a budget that can work during both difficult and profitable months, use the month with the lowest net revenue in the last 12 months for the budget. This number will be the basis for your budget. Very often owners use averages to run their business expenses. The idea here is that many businesses are cyclical and therefore, one really good month will make up for many bad months. For instance, many retail stores rely on their business making significant sales in December when holiday shoppers abound. However, depending on unusually high months to make a store profitable means that the rest of the year, the store is allowed to either break even or lose money, which is an unsettling way to run a business. If the “big month”doesn’t materialize, the company can be in a difficult if not impossible financial position. During December of 2007, many retailers were hit with an unusually slow holiday season. Small businesses were even more affected, as consumers headed to discount stores over “mom and pop” locations. This surprise hit many businesses unexpectedly, greatly reducing their 2007 earnings.

      Instead of counting on the best or even an average month, begin to look at your worst month for an indication of how much money your business can make. Using lower than usual net revenue will make your budget estimates much more predictable during difficult financial situations. Even during slow seasons, difficult economic conditions, and unusual market turns, this net revenue amount will represent the approximate amount of income your business can generate. Ideally, all of your expenses should then be reduced to less than this figure. This will create a predictable budget that will allow your business to become profitable as quickly as possible. Instead of losing money during difficult times, your business will be able to sustain itself and focus on growth, not on fighting a losing battle against the mounting debts.

      2. Required Expenses versus Desired Expenses

      In order to make the best reduction choices for your company you must commit to clearly identifying costs that are required versus the costs that are desired.

      Required business expenses are those expenses that your business cannot survive without. This will be a very short, specific list that includes only those bills that must be paid for your company to remain open. For instance, every business must have the appropriate licenses, and the cost to get licensed can range from the trivial to the exorbitant. The licenses are a good example of critical bills. If you failed to pay them, you would be out of business. This list should not include luxuries that you would like to have to stay in business (e.g., break room coffee service would not be included in this list). Your company can still do business even if it doesn’t serve employees free coffee. Therefore, this list should represent only those items that you must have to survive.

      There are also items that may be required for one business and only desired for another. Items such as rent, utilities, and licensing fees are required for any small store in a strip mall. Without these items, the store couldn’t exist. However, if you are working in a consulting business and rarely use an office or you work at home, “rent” may not be on your list, even if you currently have a lease for your business. This list is meant to represent your company’s list of only those items that cannot be sacrificed or eliminated.

      Now that you understand what to include, go through each bill and determine if each is required or desired. Expenses may include rent; utilities such as water, electricity, and sanitation; insurance; state fees; licenses; phone; Internet; loans; bank fees; and credit card fees. After you total all of these required items, you will have your business’s minimum expense list to stay in business. Now compare that number with your lowest net revenue for the last 12 months. If, in your worst month, your revenue isn’t higher than the total of your minimum expenses, review your bills again to determine if any expenses can be removed from the required list. Look hard, and remember, nothing is permanent.