Home » Articles » Expense Minimization Is Not The Answer | Edmonton Accountant
Expense Minimization Is Not The Answer | Edmonton Accountant
They were just absolutely fixated on, you know, how much they’re paying on their monthly phone. Bill. And I, I, I try to tell them politely sometimes that if tell us paid you $1,000 a month to use that phone, you’re still going out of business.
Yeah, I can see why because it’s mad. Hi,
thanks for joining us for another episode of Askpat spurl CPA. Today we’re talking to them about how expense minimization is not the answer. I have Trevor from inspired method here with me and he knows a thing or two about generating revenue for small businesses. Yeah. Edmonton Accountant, that is the, the number one way that we help businesses to succeed is what that top line revenue. So, um, it’s, it’s our pleasure and our joy to do that for business owners. And, um, let’s, let’s get into it. All right. On slowly the court that we have here today, it’s a Peter Drucker quote. He’s written, written 39 bucks, and he says, very simply, nothing happens until someone sells something and nothing happens until someone sells something. And the statistic that we’re always, you know, fighting against this, 50% of all Canadian small businesses go out of business in five years.
And the number one reason that these business owners will cite a for going out of business, the most common reason, 42% of the time, they will say that they were not able to attract enough customers or a business. Edmonton Accountant, and so the story that we have here at business owners, they’re struggling financially and they’re absolutely fixated on minimizing expenses, even though minimizing expenses, we’ll probably not fix the underlying problem. So, Trevor, what are the, what are the questions that these business owners need to be asking? Well, I think the first question is, can most employees significantly alter their income? And there it is. It’s that employee mindset where, you know, when you’re working for someone else, you know, generally you really can’t change how much you’re making. You’re making a set salary, a set hourly rate. You know, there might be a little bit opportunity to work some overtime earning some commissions, but for the most part, you’re going to meet it within a very narrow range.
Uh, no matter what you do as an employee, you’re going to be making a set amount. So if you can’t change your age, income, what do you do to increase wealth? So that’s what you do if you’re an employee and you want to build wealth is you reduce expenses. That income number is going to be the same. So if you want an increase, well you’ve got to reduce those expenses. And then the difference between the income and the expenses, now that’s money that’s available would be saved and invest and generate some passive income from, uh, you know, uh, that’s, that’s the strategy has an employee. Okay, so now why should you shift this mindset when you start a business? So, you know what, what has to happen is you have to realize as soon as you start a business, now you go from little or no opportunity to increase your income to absolute infinite opportunity to increase your income.
Um, and that’ll be the, the a number one predicated for success is if you’re able to increase that ink up. So you immediately, you have to switch that mindset. You know, you’ve spent years and years thinking everyone, you know, it’s about minimizing expenses to increase wealth through all of a sudden now you’re a business owner, you’re one of 5% of the population, unlike the other 95% who has to reduce expenditures to increase. Well, you actually have to increase revenue. And if that means, you know, spending some money to make some money or buy some time back, that can be something that you’re, you’re, you should be doing. Gotcha. So, uh, what expense categories do business owners often become fixated on? Oh Man. They become fixated on the, the least important ones. They become fixated on, you know, how much their phone bill is. Uh, you know, it.
What’s the utilities bill, uh, what is the interest and bank charges of the business? They become fixated on these small, uh, line items. Edmonton Accountant, and you know, that really don’t make a whole ounce of anything. Uh, okay. So we’ll, businesses often fail even when these types of expenses are minimized. Yeah. Sometimes I’m telling people, you know, we have a meeting booked in the businesses is in significant trouble. You know, there’s a chance that they’re going to run out of cash, uh, shortly, and they’re just absolutely fixated on how much they’re paying on their monthly phone bill. And I, I try to tell them politely sometimes that if tell us paid you $1,000 a month to use that phone, you’re still going out of business. It has nothing to do with the success of the company. Edmonton Accountant, so not only if it was free, if, if they were paying you to use the phone, it’s still not gonna make anything and they become absolutely fixated on these types of smaller expenses.
Okay. So, uh, why do you organize income statements in numerically descending order? So all organized income statements and numerically to setting or to some of the accountants will organize them in alphabetical order. All I’ll purposely, uh, you know, sort them in numerical descending order. So you have your revenue, you have your cost of sales, you ever gross margin, and then all of the general expenses. I’m going to organize a numerically descending order because as a business owner, you almost want to draw a line halfway through that and start looking at, you want to spend all of your time on the things above that line. You know, starting with revenue and then working into your gross margin. And then the most expensive, uh, administrative expenses and the most expensive overhead expenses. You want to spend the least amount of time at the things at the bottom because they’re making the least amount of impact on your bottom line net profit, right?
So that’s why I’ll always organize an income statement, a numerically ascending order. So business owners spend the most amount of time at the items at the top of that list. That makes a lot of sense. So now is it generally important to spend time optimizing your gross margin? Gross margin is one of the things that you know, you can, it has a good rate of return. You know, if you’re a contractor and you could increase the profitability of your jobs from 25% to 33%, that’s huge. That’s way more significant than your interest and bank charges, your phone bill. Edmonton Accountant, you know that gross margin. So the direct costs of labor, the direct costs of subcontractors, the direct cost of materials, you know, if you’re a physician, it’s those direct costs of those associated doctors. And what do you make after the, the, uh, revenue, what do you pay after those direct costs of what you’re going to make on that gross margin?
Those are normally big numbers and that the absolute crux of your business. So if you’re spending time to, to optimize those expenses that generally have a good payback for the time that you’re going to invest in them. Okay. So now is it generally important to spend time optimizing your admin labor? Admin labor will be usually in most businesses, one of the few overhead expenses that actually amounts to anything. And in fact, usually we start looking at the, uh, you know, the overhead or admin labor. And it’s probably as much as in a lot of businesses, as much as all of the other overhead expenses combined with the exception of probably rent is another significant one. But usually rent you’re locked into a without breaking your lease here, you’re probably not getting out of that one anytime soon. So your overhead labor is something that makes a big difference and you can usually, you know, it’s something you can adjust, you can redirect people to, you know, billable tasks or you can adjust your staffing levels if need be.
And those, those expenses will dwarf almost all of the other expenses, you know, combined. Right. So now are the remaining expenses generally responsible for business failure? They’re usually not. Edmonton Accountant, they’re, they can be a reason of why a successful business is a little bit more successful, but they’re usually not the reason why you’re either going to succeed or fail. You know, when, you know, when we’re talking about what you’re paying and office stationary and what you’re paying the accountant, and when you’re paying interest in bank charters and what you’re paying utilities, that’s not the good we’re going to be. The reason why you’re going to succeed or fail, nine times out of 10, nine times out of 10, you’re going to succeed or fail because of the revenue, because of your gross margins are, you know, because of what you’re paying your overhead expenses because of what your rent is and the other expenses, although they help, Edmonton Accountant, they make, they generally make up a successful company more successful if you optimize them, they won’t make a failing company succeed.
Right? So where should you be spending most of your time as a business owner? So, I mean, we talked about the gross margin and the overhead expenses, but even more time than that is, you know, what are those revenue generating activities? You know, what can we do to generate more revenue and when, what can we do that we make sure that we can produce more? So, you know, not just generating new business but getting through the existing business, you know, how do we increase the productivity if we already have the, the business in the pipeline, we can get more out of the door and get it done at, uh, other better margin. That’s generally where you can just spend your time as a business owner is in that top line. So advertising and marketing are very important. Kpi. I say you should be taking a look at a hundred.
Yeah. You know what, how many, how many leads are in the system, how many estimates are in the system. You know, we went back and we did a whole video series, you know, recently on, on, you know, what your ad spend should be. You know, what sort of impressions you should be getting. A what sort of clicks you should be getting. The, those are all KPIs that are our numbers that you should be tracking that are likely more expense, more pertinent than what’s your phone bill and what your inches make charges are. Yes. So now, Edmonton Accountant, what is your most important resource as a business owner? So your most important resources, a business owner. Normally people are gonna think it’s cash, they’re gonna think it’s cash most of the time. And although cash is important, probably the second most important. The most important is time.
We all only have 168 hours in the week. The most successful people, you know, the richest people in the poorest people, 168 hours a week. And how we can use that hundred and 60 hours a week is probably going to be the biggest determinant on if we are going to be a successful and not in business. So we don’t have time to do everything perfect, you know, perfectly. So we’re looking at that income statement, you know, top to bottom, you know, most significant, first, least significant. First we have to be allocating those hundred and 68 hours, uh, in our business life and personal life on the most important things first. That makes sense. So if you have some cash, you can spend money to save time, should you? Yes. And, and this, you know, that goes against that, uh, you know, that employee mindset where it’s about minimizing expenses.
But anyway, if you could buy back five hours or 10 hours or 20 hours a week and you can, and that, that costs you 50 bucks an hour to buy that back. But you can make $100 an hour and generating more revenue. You should be buying that time back all day long. A lot of times in business it’s about trading money for more time. You know, as long as you can trade it for more time at a rate that’s lower than what you could make yourself. Edmonton Accountant, you know, that’s important, right? And we also have to think about the things that, you know, we do as business owners. Sometimes there’s people who can do them quicker than we can do them. Right? Um, so even if we can do them, you know, what might be eight hours of a business owner’s time to someone who specializes in that area, you know, that might only be an hour or two hour project, uh, for them.
So a lot of times if you can trade money for more time and you know, that’s the way, as a business owner that’s going to help you, you know, spend more time on generating more revenue as opposed to the, the expenses that you know, may be a little bit easier. Sometimes people focus on those interest charges. His phone bill because they’re really easy to conceptualize. I called Telus, they get a $5 discount. Yeah, it’s good. It’s simple. But you know, the things that are gonna make you a winner, probably the harder writings, you know, generating that additional revenue. Edmonton Accountant, you know, free up your schedule that you can actually generate that additional revenue. Yeah. And I would put this out there and maybe you can confirm this, that if you are majoring on the minors, which means if you’re looking at your phone bill and, uh, the small expenses, if you, if you’re at the position where those things are a big concern of yours, you’re probably in a bad situation already.
Yes. Yeah. So just putting that out there, and I’m coming in and talking with Josh. It’s Berlin associates, a CPA. He is going to be able to dissect and take a look at your business and really help you to focus on what is important for the top line revenue, those top line items that they’re super important. So I’d encourage you to come in and a schedule that appointment, get a free book, and go online to spurl.ca and um, if you like what you hear here today, then please give us a thumbs up like the channel and give us some comments down below and just tell us how we’re doing and we’ll give you some amazing content going forward. And stay tuned for the next episode of ask spurl CPA, they serve much guys.