One of the most frustrating questions a business owner can ask is, “Why am I not making more money?”
Sometimes the answer isn’t a lack of sales. Sometimes costs are quietly creeping up.
Vendor prices increase. Insurance premiums change. Payroll costs rise. Discounts disappear. Product costs go up a little at a time. Individually, these changes may not seem significant, but together they can have a major impact on your bottom line.
In Episode 40 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss how business owners can identify creeping costs and take intentional steps to protect profitability.
Listen to Episode 40
A Real-World Example: When a Discount Disappears
This conversation came from a real experience at Lee Davis and Company.
One of their clients unexpectedly lost a payroll discount that they had been receiving through Lee Davis and Company. Lee recognized the impact and pushed to have the discount reinstated.
That experience highlights an important lesson:
You have to pay attention to what your vendors are charging you.
If you aren’t watching your expenses, you may not notice when a discount disappears, a price increases, or a service changes.
And when you don’t know your costs have increased, you may continue operating as though your old pricing and profit margins are still working.
Don’t Just Look at Your Bank Feed
One of the best ways to understand your costs is to actually enter your expenses into QuickBooks correctly.
That means using the appropriate forms, such as bills and checks, instead of simply relying on the bank feed to tell you what happened.
When you properly enter your expenses, you create a much clearer record of what you are spending and why.
The bank feed can help you verify transactions, but it shouldn’t replace a bookkeeping process.
Accurate records give you the ability to ask better questions:
- What am I spending?
- Which vendors have increased their prices?
- Which expenses are increasing the fastest?
- Are my product costs reducing my margins?
- Am I still receiving the value I expected from a vendor?
- Is this expense necessary?
You can’t effectively control costs if you don’t know what they are.
The Cheapest Option Isn’t Always the Best Option
Cost control doesn’t mean choosing the cheapest possible vendor every time.
Lee and Erica emphasize the importance of considering quality as well as price.
A lower-priced product or service isn’t necessarily a better deal if it creates more problems, takes more time, performs poorly, or results in unhappy customers.
Business owners need to understand the value they’re receiving for what they’re spending.
The goal isn’t simply to spend less.
The goal is to spend intentionally.
Review Your Insurance
Insurance is another area where costs can creep up, and it can be easy to simply renew a policy without taking a close look at what you’re paying for.
Read the fine print. Understand your coverage. Know what has changed.
It can also be helpful to work with an insurance agent who is willing to shop around for you.
The cheapest policy isn’t necessarily the right policy, but neither should you automatically assume that your current policy is still the best option.
Your business changes over time, and your insurance needs can change with it.
Watch Cost of Goods Sold and Gross Profit
For businesses that sell products or have significant direct costs, Cost of Goods Sold (COGS) deserves special attention.
If the cost of the products or materials required to generate your revenue increases, your gross profit can shrink even if your sales remain steady.
QuickBooks can help you look at historical information and see how your numbers are changing over time.
Don’t just ask, “How much did we sell?”
Also ask:
“How much did it cost us to generate those sales?”
Understanding your gross profit gives you a better picture of whether your pricing is actually working.
Compare Expenses by Period
Another useful strategy is to compare your expenses from one period to another.
For example, compare your Profit and Loss reports by month.
Look for the five largest increases.
You don’t necessarily need to investigate every single expense at once. Start with the areas that have changed the most.
A significant increase might be completely reasonable. Perhaps you hired someone, purchased new equipment, or experienced a seasonal expense.
But it could also reveal something you didn’t realize had changed.
The important thing is to ask why.
Review Your Expenses Annually
At a minimum, business owners should conduct a thorough expense review every year.
Look at your vendors, subscriptions, insurance, services, supplies, and other recurring costs.
Ask:
- Are we still using this?
- Is the price still reasonable?
- Has the vendor increased the price?
- Are we getting the quality we need?
- Can we negotiate a better rate?
- Is there a better option?
- Does this expense still support the business?
Small expenses are easy to ignore. Recurring expenses are especially easy to overlook because they become part of the routine.
But a recurring expense that increases by even a small amount can become significant over a year.
Use Purchase Orders to Stay Ahead of Price Increases
Purchase orders can also help businesses stay organized and monitor product costs.
Creating a purchase order establishes what you intend to purchase and the price you expect to pay.
When the bill arrives, you can match it against the purchase order.
This gives you another opportunity to catch unexpected price changes.
If you expected to pay $X for a product and the bill comes in higher, you now have a reason to ask questions.
Without that comparison, an increase may simply disappear into your expenses.
Negotiation Doesn’t Have to Be Confrontational
If a vendor raises a price, you don’t necessarily have to become combative.
Start a conversation.
Ask questions.
“I noticed our price increased. Can you help me understand why?”
“Is there anything you can do about this rate?”
“Are there other options available?”
Simply bringing up the conversation can make a difference.
Your vendors want your business. Business relationships are partnerships, and a good vendor should be willing to have a conversation about pricing, service, and value.
Be curious.
You may discover a discount, a different pricing structure, a better product, or another solution you didn’t know was available.
And if you need to push back, push back professionally.
Look at Overtime Carefully
Payroll is another significant business cost that deserves attention.
Overtime may be necessary in some situations, but business owners should understand whether the additional hours are actually producing additional value.
Look at your overtime costs and ask:
Is this expense actually moving the needle in the business?
If overtime is increasing but revenue, productivity, or customer satisfaction isn’t improving accordingly, it may be time to look at staffing, scheduling, processes, or workload.
The purpose isn’t necessarily to eliminate overtime.
It’s to understand what you’re paying for and whether you’re getting the result you need.
Use QuickBooks to Find the Increases
QuickBooks becomes much more useful when you use your historical information to identify trends.
One helpful step is to run a Product and Service report and look at increases by percentage.
This can help you identify products or services whose costs have changed significantly.
You can then investigate those changes instead of allowing them to quietly reduce your margins.
Your QuickBooks data should help you ask better business questions.
If a cost has increased, find out why.
If a vendor’s price has changed, ask about it.
If gross profit is shrinking, investigate your COGS.
If overtime is increasing, determine whether it is producing results.
If insurance costs have changed, review the policy.
Clean Up Your Books to Understand the Whole Story
You can’t manage costs effectively when your books aren’t accurate.
That doesn’t mean you need to fix everything overnight.
Take small steps.
Make sure expenses are being entered correctly. Use the right forms. Keep your Chart of Accounts organized. Reconcile your accounts. Review your financial statements regularly.
The cleaner your books are, the easier it becomes to see the whole story.
And when you can see the whole story, you can make better decisions.
Steps to Take Control of Your Costs
Controlling costs doesn’t require one dramatic change. It starts with consistently paying attention.
Here are a few practical steps:
- Review your expenses annually.
- Compare Profit and Loss reports by month.
- Investigate your five largest expense increases.
- Monitor Cost of Goods Sold and gross profit.
- Use historical QuickBooks information to identify trends.
- Create purchase orders and match them to bills.
- Enter bills and checks instead of relying entirely on the bank feed.
- Review vendor pricing and negotiate when appropriate.
- Review insurance coverage and pricing.
- Analyze overtime to determine whether it is producing results.
- Run Product and Service reports to identify significant increases.
- Make purchases intentionally rather than automatically.
Know What You’re Spending
Business owners don’t have to become accountants to become better at controlling costs.
They do, however, need to know where their money is going.
QuickBooks can help you compare prices, identify increases, review historical information, and understand how expenses affect profitability.
The key is to use the information rather than simply record it.
Know what you’re spending. Ask questions. Review your vendors. Watch your margins.
And when something doesn’t make sense, investigate it.
The Bottom Line
Costs rarely announce themselves all at once.
They creep.
A small vendor increase here. A lost discount there. Higher insurance premiums. Rising product costs. More overtime. Additional subscriptions.
Over time, those increases can significantly reduce your profit.
The good news is that you can take control by paying attention to your numbers.
Use QuickBooks to understand your costs, compare periods, identify increases, and ask better questions. Take small steps to keep your books accurate, and use that information to make intentional purchasing and pricing decisions.
Because sometimes the answer to “Why am I not making more money?” isn’t that you need more sales.
It may be that you need to take a closer look at what you’re spending.
Don’t let costs creep up unnoticed.
If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.