5 Ways to Improve Your Bottom Line: Part 1: Cost of Sales

As a busy entrepreneur,  keeping track of where your money goes can be difficult.  Your efforts are on sales; marketing for them, making them, billing for them. Our bookkeeping firm deals with many different types of businesses, however most businesses share common issues where even small tweaks can make a difference in your bottom line. We also know that most business owners look at the monthly P&L, and when you do, your eye naturally goes first to these three numbers: sales, cost of sales, and net income.

If you are at all disappointed in your net income, the tendency is to blame sales, but would you be surprised to know that you have the most control over cost of sales and other items that you probably don’t even focus on?  While building sales is important to increasing income, we’ll table that conversation for now.  Let’s explore your expenses. (This article, Part 1, is for those of you who sell products in inventory.  If you provide a service, you may skip ahead to Parts 2 and 3.)

Cost of Sales: Generating income depends on many factors, but you have much more control over your gross profit through your costs.  Let’s say that you purchase medications, vaccinations, supplies, etc.  These are, by definition, your cost of sales.  How can you lower your cost of sales in order to increase your profits?  Here are some ways you should consider:

  • Negotiate with your vendors on price.  Yes – ask for better prices!  You have sales reps who are paid commission on what they sell you; there is wiggle room in the prices, built into their commission. Try this:  “we’ve been working with you for a number of years now, and I’m looking to consolidate our purchases and have them come from fewer sources.  What can you do for me if I start buying prescription dog food from you rather than Vendor X?”  You need to have this conversation at least once a year, as prices are always changing and your sales rep wants to keep you happy.  If they don’t provide you with what you want, move on.

At the bottom of this article, I demonstrate how lowering costs, while not changing your sales price, adds to your profits.  Caveat: I go a little overboard on the math and charts, but if you like that sort of thing, I invite you to review it.

    • Negotiate with your vendors on terms.  If your suppliers offer you 30 or 60 days for terms, this is fantastic for your cash flow, but what about asking for a discount if you pay at the time of sale?  2%10 net 30 is still common (you get a 2% discount if you pay within 10 days, rather than waiting the allotted 30), but if you have the means to not wait the 30 or 60 days, you should be able to take a discount.  Again, ask!
    • Watch your inventory.  Like a hawk.  I’m not just talking about locking it up and only giving the keys to your most trusted employee (we can’t be naive about how common it is for inventory to go missing.)  Inventory control is an acquired skill that is now, fortunately, aided by efficient practice management software that will let you know what you have, what you need, and when you’ll need it.  If you over-order, you run the risk of shelving obsolete or expired supplies.  If you under-order, you can’t make the sale.  Inventory tracking is probably included in your management software, so use it!
  • Use your Practice Software to analyze your gross margins. I can’t stress enough how important it is for you to utilize your CRM / inventory software.  Your subscription cost hits you every month, so use it!  If you set up the inventory properly, as I mentioned above, the program will track costs, as you enter new purchases into the system.  If you run monthly inventory reports on sales and cost of sales, you will have a clear analysis of not only how much you sell, but how profitable each item is.  So if, for example, your profit margin on one item is 50%, but the profit margin on another is only 5%, you may want to take this up with your vendor, or find a new source.

To adopt all of these procedures takes time, and to analyze them takes learning and discipline. Naturally, I recommend the services of a reliable bookkeeping firm to set them up for you and train you and your staff to utilize them.  In my experience with business owners, most of you are happily busy taking care of your sales.  You find yourself with a successful, growing enterprise, with little time to take care of all of the financial intricacies.  Whether you reach for consulting help or take care of the details yourself, let’s not leave money on the table – let’s start with an easy step and open a price negotiation with your vendors.

In Part 2, I will talk about a cost center that is most likely your biggest and most painful expense:  Payroll.  

As promised, here are some examples that demonstrate the power of lowering your costs:

Let’s say you sell an item for $50, and its cost to you is $35  Let’s also say that you sell, on average, 60 of these per month, or 720 per year

 

Now, let’s negotiate a discount with our vendor.  Can you get 5%?  How about 10%?  Let’s see how those two scenarios increase your gross profit (still selling 720 units per year):

So, with a 5% discount you will increase your profit by $1,260 per year, and with a 10% discount, your gain is $2,520.  That’s just for one item – imagine the possibilities.

Now, to completely belabor this issue, I want to show you the other side of it:  how many more units would you need to sell, at the $60 price with the original $35 cost (no discount negotiated) to reach the same gross profits realized with negotiations?

And finally, if you’re thinking “why don’t I just raise the sales price?”, check this out:

WHAT PRICE WOULD I NEED TO SELL ORIGINAL 720 UNITS FOR TO REALIZE GAINS OF: (Cost remains at $35):

At this point, you should be thinking:

  • What works best for my business: raising my prices, or negotiating a discount?
  • What if I do both?

Moving on, we will address other expenses in the next two articles; expenses affecting service industries as well.

5 Ways to Improve Your Bottom Line: Part 2: Payroll

In Part 1 of our series on 5 Easy Tips to Increase Your Net Income, we discussed the ways to benefit from reducing your cost of goods sold and tracking your inventory.  Here, in Part 2, I’m going to give you some tips on controlling what is probably your biggest expense:  Payroll.

If you’ve established a veterinary practice, you are, by definition, a compassionate person, and you probably think of your employees as family – the last thing you want to do is reduce your workforce in order to save money.  For that reason, I will touch on some ideas that should be considered before using desperate measures.  You must, however hard it is, keep in mind that you are running a business first and foremost, and you should expect your employees to perform their duties at least in the manner you have outlined, and hopefully, documented.  If you are lucky and astute enough to hire the right people, you will be able to surround yourself with skilled and loyal employees who you will have the joy to work with for many years.

Here are some tips for keeping your payroll costs from getting away from you:

Hire well:  Employee turnover is expensive.  There are the financial costs and the hidden costs, the ones that  don’t show up on your financial reports:  

  • Training:  How many hours does it take to train a new employee?  While your current employee is training the new one, it’s pulling her off her usual duties, and she may even be clocking overtime.  Multiply that by how many new employees you go through, and the cost soars.
  • Employee Taxes: Federal Unemployment taxes are capped at the first $7000 of payroll, which means that if you keep the same employee for the whole year, you don’t have to pay the tax after he has reached $7000 in payroll.  If you hire three different people, you get to start over each time.  State Unemployment taxes and Disability Taxes have similar caps as well.
  • Employee Morale:  Your employees really hate it when you hire someone who cannot catch on to the job duties or keep up with the routine.  One bad apple can truly spoil the whole bunch and the work atmosphere and performance can suffer.
  • Your Morale:  Knowing you have to terminate an employee is unpleasant and draining.  No matter how many times you’ve done it, it never gets easy.

So how do you hire the right people?  By doing the due diligence of reviewing resumes, and checking references, checking references, checking references.  I know, I’ve done it – I’ve fallen in love with a candidate who I thought was a perfect fit, only to find out that she was much better at interviewing than working.  By checking with past employers, and asking “If you had the opportunity, would you re-hire this person?” you can find out a lot of information.  You may not get an emphatic “No!”, but a long stretch of silence is very telling.

Another way to find good employees is by recommendations from current employees.  No one wants to work with friends who they know won’t be a good fit – it reflects badly on the one recommending them.  Most of my best employees have come from this source.

Recruiting firms, while expensive, do the screening for you, and carry a guarantee of satisfaction.  Temp agencies, again, while expensive, offer an easy out if the person doesn’t work out.

My final words on this subject is something I learned over many years of hiring and dismissing employees:  It’s all about the attitude.  You can train someone with a good attitude and the proper experience to perform a new skill, even if they’re not a perfect fit for the particular position you are filling.  But never, ever hire anyone who has a personality which clashes with your work environment, no matter how skilled or qualified he is for the position.  I’ve hired the better suited candidate whom I didn’t particularly like, and it has never worked out.

Bonuses rather than raises:  We’ve all done it – you award a generous raise to your employee(s) for a job well done – maybe they helped land you a new contract. You don’t want them to look for another job, plus, they know you’re getting more money, so why not share the wealth?  But what happens when you lose a current client, don’t get a contract you really expected, or business just sort of tanks for a while, like it has during the first six months (so far) of 2020?  It’s much harder to “take back” a raise and reduce employee pay because you’re not doing as well as you expected.  To show your appreciation for a job well done, a bonus is often in order, because it’s a one-off.  You have the funds at the time, and you really do want to spread the joy.  Your employees appreciate a bonus and the recognition and gratitude that come with one.  Remember, you are the owner of the business and while your employees share in the workload, they do not share in your risk, and probably wouldn’t want to, so it’s not a good habit to associate their pay with your acquisitions.  They don’t expect you to, anyway.

One more comment on raises:  there is nothing wrong with giving out periodic merit and cost of living increases, and you should review everyone annually.  However, you do not have to give a raise to everyone, every year if you can’t afford it.  

Incentive programs: Veterinary practices often offer structured commissions to their vets, through base salary plus percentage of production (ProSal).  Without going into the pros and cons of awarding commissions for paying your vets based on billings, it is very common in the industry, and ensures that everyone is compensated for increased revenues.  There is ample information about this on the AAHA website at www.aaha.org.

For your techs and receptionists, it’s a win-win to pay them commission on sales of products you offer.

 When employees leave: It happens often that when an employee voluntarily leaves, you wonder if you really need to replace him.  Particularly during the pandemic, business owners who had to furlough employees are reassessing their needs regarding how many people they really need to successfully run the operations.  When you lose a worker, it’s best to step back and determine if the job can be done by remaining employees without undue burden.  If you do hire a replacement, it’s also a good time to re-think your pay rates if you felt that you weren’t getting your money’s worth.  

Use a payroll service:  There are still those of you holding on to running your own payroll, but it’s a time-consuming task and you probably hate it.  You can maintain control without having to do the grunt work by having your bookkeeper provide you with timesheet approval reports, which allow you to keep an eye on your employee hours and overtime.  Your time is better spent generating the income you went into business to do.

Hire a manager/administrator:  It sounds odd to hire a manager in order to save on payroll, but this is a long-term investment that will pay off in the long run, both financially and emotionally.  With growth comes growing pains, and when you find yourself bogged down with financial, administrative, and employee decisions, the joy of having your own veterinary practice will quickly fade.  For purposes of payroll, a manager will be able to help make necessary decisions and have the difficult conversations with staff that you find unpleasant and frankly don’t want to be involved in.  Keeping yourself at arms distance, even if the big decisions are ultimately yours, provides you with a buffer that is necessary to run an efficient business.

As a growing veterinary practice, your payroll costs probably account for the highest expense on your profit and loss.  It is essential that you analyze your payroll KPIs monthly in order to keep costs from getting away from you and make small tweaks regularly rather than find that you have to make painful choices down the line.

5 Ways to Improve Your Bottom Line: Part 3: General Expenses

We have many bookkeeping clients, and I don’t need to invent or exaggerate when I give you examples of some of the, let’s call them oversights, we regularly see in businesses – all businesses, not just the veterinary practices.  Variable, or general expenses are the easiest to control and the fastest to get out of control, so let’s look at a few.  (Remember, fixed expenses are those over which you have little control: your rent payment, phone, equipment and auto leases, etc.  Variable expenses are those you can control.)

 Office supplies:  I had a client who had the following range of charges, on a monthly basis: (the type and size of the business is immaterial – trust me when I say that the expenses were way over necessary.) 

Amazon:  $5,000 – $8,000

Printer Repair: $450 

Office Depot: $1,000 – $3,000

Smart & Final:  $1,500 – $3,500

Etc. Etc.  

Now, it doesn’t take a genius to see that there is room for some analysis here, and I don’t consider myself only a recorder of transactions; I am a consultant and advisor to my clients, and I watch these types of expenses. Without even venturing into the uncomfortable questions regarding where is this stuff really going, I started with: “How much would a new printer cost, rather than repair the old one?”  Then it’s time to dive into an itemized list of the items purchased each month and keep track of the usage.

Meals and Entertainment:  Need I continue?  This is an expense that is relatively easy to cut back, and with little pain.  Also, it helps to remember that meals are only 50% deductible on your tax return.

Software and Computer Expenses: It’s a good idea to review your monthly payments that are automatically deducted.  There are probably a few apps that you don’t even use anymore.  Go over your Microsoft, practice management, and  QuickBooks accounts to make sure that you’re paying for the right number of users.  

Advertising and Promotional:  Are your Facebook and/or Google ads paying off?  If you are paying someone to manage your social media, she may not have incentive to keep an eye on the budget and make changes.  This is an area where your periodic review is needed.

Bank Charges:  If you are maintaining a high balance in your operating account, your bank should be charging you a minimal monthly fee.  If you’re not maintaining a high balance and getting a lot of overdraft fees or fees to transfer from savings, you need better cash management.  These add up!

Credit Card Merchant Fees:  This is the fee you pay when you are paid by credit card, and needs to be shopped around and reviewed every couple of years.  Things to consider are the rate paid for each credit card (AmEx is traditionally more expensive to run than Mastercard or Visa), and how long it takes for the deposit to be in your bank.  If you need the money in one day, you may pay a higher percentage than if you can wait two days.

Credit Card Interest: This is what you pay when you use your own credit cards for purchases and don’t pay them off monthly.  The ideal goal is to use your cards for supplies and materials, build your points, then pay the balance off every month.  When this is not feasible, use the cards with the lowest interest, if you must.  It’s wise to contact your credit card bank every couple of years as well, to negotiate better terms.  

These are just a few items that are not difficult to monitor on a monthly basis.  The important thing is for you to get in the habit of reading your financial reports and drilling down to see where your money is going.

QuickBooks Online: The Only Choice for Your Firm’s Accounting Software

quickbooks online logoAre you ready to relieve yourself from the burden of doing your own books, but you need a bookkeeping service with expertise in legal and trust accounting?  Do you still want to take an active part in your day-to-day accounting but need help to properly set up your system and train you to use it? 

Susan Natali Bookkeeping uses QuickBooks Online exclusively in our legal accounting services. Together with various legal practice management software programs, bill paying, and other third-party apps designed to work with QBO, we are able to successfully set up and maintain your legal firm’s accounting system. 

We are a virtual bookkeeping firm, and we are here to switch your company from QuickBooks Desktop, spreadsheets, or whatever outdated desktop legal accounting software you presently use, to an online, paperless, no flash-drive, 21st century system.  You’re ready, you just need help – let us make your life easier!

First, there are always naysayers (they are mostly CPAs)

Some of the objections to QuickBooks Online:

  • Security

We hear it all the time – “Aren’t we more susceptible to a cyber break-in if our information is in the cloud?” While no one is ever 100% safe from hacking, QBO utilizes the same online security as banks are required to provide their clients.  You are accessing your information through Intuit’s servers, rather than from a browser on your desktop, which is much more vulnerable to back-door break-ins.

For further information on QBO security, read here:  https://quickbooks.intuit.com/global/security/

  • Can QBO track my client trust accounts?

Tracking trust transactions using QBO, if set up properly, is painless.  There is a simple way to set up and maintain trust information separately, for each client, that will be easy to reconcile with your practice software.  To briefly describe it, we set up a sub-account in the general ledger for each client, under the “Trust Account” bank account as the main account. This way, fund transfers are kept separately for each client.

  • Can I get the robust reporting I need?

QBO can be used as a stand-alone accounting software for legal firms, or it can go hand-in-hand with other legal time-tracking and billing software.  Regardless of your choice of practice software, QBO provides accounting reports that go beyond what Clio can tell you. QBO reports are customizable and user-friendly and provide you with client reports as well as expense reports, Balance Sheet and Profit and Loss.  All of these reports can be run on a comparison basis, by time period, by profit center, you name it!

  • It’s totally different to operate than QB Desktop

I will grant you that, if you’re accustomed to the QuickBooks Desktop version, QBO will take a little getting used to.  It even looks different, but give it a chance. QBO is a web-based software, so it looks more like a webpage than the static page of other legal accounting software.  I guarantee that, in a very short time, you will know your way around and enjoy the added benefits that QBO has over the QuickBooks Desktop, which I will delineate below.

  • Cost

I know, I know – you only paid $250 for QuickBooks Pro Desktop version, however, did you know that after 3 years, Intuit “sunsets” the annual updates, so if you last purchased it in 2017, you can’t get support, upload bank transactions, nor run payroll after 2020?  Besides, if this is about how much you spend on software, and you don’t like paying monthly for legal accounting software, consider the time savings you will experience when you move over to QBO’s more automated entries: daily bank and credit card updates, synchronization with your practice software (eliminating the need to enter transactions twice), automatic default entries on invoices and bills – the list goes on.  

With QBO as your legal accounting software, the need for a full-time bookkeeper is a thing of the past.  If you run a small or solo firm, you can handle all of the bookkeeping tasks easily; as you grow or when you decide your time is better spent billing clients, hiring a freelance, part-time bookkeeper will be the best solution to meet your accounting needs.

Why You MUST use QuickBooks Online:

  • It’s web-based and can be accessed anywhere

Many law firms today, solo or small groups, have set up their practice to be portable; gone are the days of committing to costly office rents.  Many of you work out of your home office, or if you haven’t made that leap yet, you’ve dreamed of being able to go completely virtual. QBO allows you the freedom to practice law from anywhere!

  • Additional users without purchasing additional licenses

With QBO Plus the monthly fee allows up to 5 users with access to the platform; with QBO Advanced, up to 25!  That’s not counting an additional two spots allowed for a bookkeeper and accountant.

  • Automatic Bank and Credit Card Downloads

With QB Desktop, bank downloads are initiated manually and transaction matching is clunky, but QBO downloads transactions daily, and intuits, through historical entries, where to assign expenses and transfers. Big, big time-saver.

  • Hundreds of Apps Written for QBO

Today, because of the number of businesses using QBO, third-party software developers are targeting the QBO market and making sure that their software syncs with QBO.  You have many choices and the ability to customize your stack offers the most latitude when you use QBO.

  • Automation Tools for Invoice Emailing and Reports

Traditionally, law firms email  invoices all at once, at the end of the month.  QBO enables you to batch email all or some of the invoices at one time.  You can also enable automatic reports to run every month, every week, or even every day.  

Natali Bookkeeping uses QBO exclusively for its legal clients.  We are able to make the changeover from your current system to bring you into cloud accounting; the changes it makes to your business will bring you additional time, money, and most importantly, control!  

Most importantly, we know how to set-up and properly maintain your trust accounts.  Whether you’re looking for a virtual bookkeeper, or you’re still willing and able to track your own legal accounting, we can get you set up and pointed in the right direction.

By |2019-09-12T07:48:56-07:00August 30th, 2019|Quickbooks Online|Comments Off on QuickBooks Online: The Only Choice for Your Firm’s Accounting Software
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