The first danger signal Gene noticed was the shrinking checking account balance. A quick check of the current bills revealed that he could only pay half of them immediately. The end-of-the-quarter sales report confirmed that sales were lagging nearly 15 percent behind last year.
When a new competitor entered the market six months ago, Gene wasn't too concerned. Business had been good and there was plenty of cash. Now suddenly, things were going downhill fast and Gene wondered how he could keep up with expenses.
Fortunately, Gene's situation is not an actual case. However, I've worked with many business owners in similar circumstances during the last 10 years and situations just like this do occur all too frequently.
A common question I receive is, "How do you protect your business from competition, economic downturns and other adversities?" One of the best protections I know is to run a cost-effective operation. When you run a lean, trim business, devoid of unnecessary expenses, you can deal with tough times when they come.
Running a bare-bones operation is always easier to talk about than do. Business expenses just naturally have a way of piling up during the good times. When sales are up and profits are increasing, expenses tend to creep up as well. Getting rid of those little extras is often more difficult than one would expect. Trimming fat from a business requires dedicated, day-to-day discipline.

An ounce of prevention
One of the best ways to check your expense fitness level is to compare your expenses with other businesses like yours. When you compare your costs to industry averages, you can see quickly if any expense categories are out of line.
One word of caution here. You should not be content to be "average" in your industry. In tough times, only the best survive. Your goal must be to position your firm well above the average.
Another good principle to apply is to look beyond the largest expense categories. Remember, small expenses add up, too. Rather than trimming a big category by 15 percent or 20 percent, look for 15 to 20 areas that you can trim by 1 percent or 2 percent. The results will be positive and you don't run the risk of crippling your business because you cut too deeply in one area.
You can use the A.R.A.'s Cost of Doing Business report and you must also use your own historical financial statements as a guideline.
A good starting point is to calculate your operating expenses as a percentage of sales. Look at the last three or four years to see if there is an established trend. Regardless, your goal is to reduce fixed expenses as a percentage of sales. It doesn't matter if sales are up or down, reducing expenses as a percentage will strengthen your financial position.

Be careful where you cut
While there are no sacred cows you should protect when eliminating waste, there are some areas where you need to observe caution. Advertising and promotion budgets deserve careful examination. You should try to trim waste, but don't cut here just for the savings.
Use care when reducing labor costs. You must keep customer service at a high level to be competitive.
Finally, never delay in paying income and withholding taxes. Some creditors can be hard to deal with, but the IRS can lock your front door.
The best possible position to work from is not allowing fat to accumulate in the first place. To ensure success you must make a commitment. Cut the fat and get more competitive.