Profitability is important for any business, including technology companies. One of the most important ways for a company to ensure good profitability is by keeping costs low.
Good and bad costs
This point is not very complex, but to make it a bit exciting: you have good costs and you have bad costs. The good costs, when it comes to profitability, are scarce. This may concern certain forms of investment, but it mainly concerns sales and marketing costs.
Sales and Marketing costs are good costs, because they are preferably temporary costs, such as for events, digital advertising, radio and television spots, et cetera. They do put pressure on profitability. But if you have a healthy business, where customers don't run away from all sides, marketing is not a primary necessity of the company.
If you turn off the marketing, then that is actually a company choice to grow less quickly. That is why you can also say with a company with a lot of growth potential: if your profit is very high, you can also say that the company can grow faster!
This may sound obvious, but you often see confusion here. This is most obvious with stock exchange funds. When the profits of a publicly traded company collapse, there will always be investors who will run in panic and cause the price to fall — even if the profit slump is caused by major marketing efforts designed to accelerate growth and increase profitability.
The question investors then ask themselves is: are those marketing dollars well spent? Do we see that the turnover is increasing? The other side of the coin is: how well are they spent if you leave them in the bank as a company?
The Bad Cost
Then the bad costs: there are more of them. At No Monkey Business, we always look at our clients' profit and loss statements. The standard question is whether the recurring costs lead to less profit being made than in line with the market. If so, it is important to want to recognize it as a company and even more important to take action.
Sometimes that leads to difficult choices. A cost item that is often too high is personnel costs. No Monkey Business always asks about the average salaries per function group: sales, technical personnel and so on. If your personnel costs are high versus those of the competition, then the flip side of the coin is that your people are not delivering enough (in money). This often concerns employees who have received a salary increase in the last 15 years without a clear explanation.
With employees that are too expensive, you will eventually find yourself in a situation in which the innovative power of the company is inhibited. Suppose a new competitor establishes itself in your market, with young employees, who start in a completely different salary structure – and who also comes with an innovative product. How can you still compete and maintain margins?
The only solution is to say goodbye to overpriced employees. In any case, you can ask yourself whether it is good for them to stay in the same position for too long. You can see at a glance whether salaries are in line with the market via the website such as loonkompas.nl.
The second important recurring cost item is office expenses. Certainly at companies that have been around for some time, you see that they have too much office space. A rental contract was entered into years before the corona pandemic, so to speak. Then came working from home and now hybrid working – with offices that are mainly still places to get together.
However, many companies still have traditional offices. You know them, offices where you arrive on Friday morning, and there are only three people on 800 square meters. It should also be possible with a third of the surface area and a better design. That makes the company better equipped for the future, and it could save you 100,000 euros a year.
Third recurring cost item to look at is the vehicle fleet. More corporate companies tend to work with short-term contracts, and that's fine. Not good – especially with a view to a sale of the company – are financial leases or the purchase of cars.
Transactions with cars enable the entrepreneur to gain legal private advantage, but because cars are assets that you depreciate over the long term, they do affect profits for a long time. And you can't just throw away a car for a good price. The advice of No Monkey Business is: if you want a nice car for yourself as an entrepreneur through a financial lease, then you should do that. But don't do it for your staff. Remember, if they leave, you might be in the car.
Fourth and last important recurring cost item is a special case. Costs can also be too low. Many director-major shareholders sometimes pay themselves too poorly. A management fee of at least 120,000 to 150,000 euros is still usual.
If the company has a management team of four people and they each receive 80,000 euros, then profitability is actually artificially boosted by 160,000 euros or more. A buyer will always look at this – because he assumes that he will have to pay market-based salaries. Profitability immediately drops.
Long live temporary costs and low recurring costs – provided they can be kept really low!