Tips Provided For Controlling Key Expenses to Enhance Profitability

by WOHe

Tips Provided For Controlling Key Expenses to Enhance
Profitability

Most kitchen and bath dealers understand the differences between
fixed and variable expenses those that are constant and unaffected
by sales and production, as opposed to those directly affected by
sales.

However, there is a third type of expense classification which,
if monitored and controlled, can make a big difference in a
company’s profits and cash flow.

The expense classification in question has been labeled by some
business management specialists as “discretionary.” Discretionary
expenses are those you may control in order to decrease the
reported profits of the company for tax and other purposes.

On a company’s P&L statement, fixed expenses are listed
under the heading, “Selling, General and Administrative” (SGA). But
the following expenses can be separated from the SGA for further
analysis:

  • Officers’ Salaries: Are the officers of your company willing to
    decrease their salaries in order to free up additional dollars in
    the company? Do not forget non-cash forms of officer compensation,
    including dividends, travel and entertainment expenses, rent
    expense (officers own the facility where the company is housed),
    interest on officers’ loans to the company, pension fund
    investments, company vehicles, and others. These must be taken into
    account for a true picture.
     
  • Interest Expense: Interest is a discretionary expense item only
    when the amount of debt your company carries increases, decreases
    or is refinanced. If you restructure existing financing or pay off
    a loan, your interest expense may be less.

    However, this may be offset by any additional debt your company
    incurs due to a business expansion project, such as a new showroom
    or warehouse.
     

  • Depreciation: Depreciation is a non-cash expense that reflects
    the “wearing out” of assets such as showroom displays, vehicles and
    power tools over time. When assets are purchased (with the
    exception of land), they are useful to a company for a limited
    number of years. The cost of each asset is expensed over the period
    of time during which services are received from the asset. The
    purpose of depreciating an asset (even though no actual “cash” is
    paid) is because at the point in time when the asset wears out, a
    new cash payment must be made in order to replace the asset.
    Different assets have different depreciation schedules (or “useful
    life” as defined by the IRS). If a company is profitable, it may
    accelerate depreciation in order to reduce reported profits.
    Because depreciation is a non-cash expense, a cash payment is not
    made by the company to “Depreciation,” and more dollars are
    available to invest in new assets.
     
  • Rent: Rent expense may be discretionary for several reasons.
    First, you may own the building or facility and rent it to your
    business. Typically, the amount paid in rent is enough to cover the
    debt service on the building and other associated expenses, such as
    real estate taxes and insurance, which may or may not be included
    in the lease agreement.

    Second, your company could eliminate rent payment by purchasing the
    building it is currently leasing. Cash that’s used to make a
    monthly rent payment would then be available to your company.

    Kitchen and bath dealers are strongly advised to review these types
    of expenses as well as the company’s balance sheet and P&L
    statement regularly with an accountant. They can dramatically
    impact your company’s financial health, tax liability and
    credit.

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