Tips Provided For Controlling Key Expenses to Enhance
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.