Simply put, profit is the difference between top line revenues and expenses. As such, managing expenses is the key to profitability. In our company about 65% of our expense line relates to headcount. For that reason, as CEO of our company, I approve all new headcount to make absolutely sure we need to add staff. And for us, adding staff could either be in one of our offices around the world, or in our off-shore engagement in India.
In addition, I sign off on base pay to make sure that we have consistency in our salary administration and that we are not paying more for talent than necessary. Obviously, this level of CEO involvement would not be possible in a Fortune 500 company, however, even in larger companies, new headcount in general, often requires senior management approval because of the fully loaded cost of people.
The next big expense item is lease expense and or if buildings are company owned, property mortgage, tax, maintenance, insurance etc. Often companies find themselves with too much space, which must be disposed of to eliminate unnecessary expense. This leaves about 25% of a company's expense line as discretionary expenses that must first be prioritized and then managed. These expenses are the responsibility of every employee of a company.
Many years ago, we had a manager who was very focused on expense management, so much so that she controlled the doling out of pens. This is an extreme example; but it makes the point that saving nichols, dimes and quarters add up to dollars that can impact profitability. We once determined that we were spending $20,000 a year on file materials, when older files could be reused four or five times before becoming useless. That one was a no brainer. There are many similar examples of wasted money in day to day company management.
We have now equipped our major offices with video equipment to cut travel costs. It is highly likely that with focus, discipline and maybe a little passion, it is not too hard to cut discretionary spending by 10%, without negatively impacting company operations. And, why not do it when employee bonuses are at stake.
Aside from very nice working conditions and the typical employee benefits and recognition awards, we provide very few other perks for our employees because once offered they are hard to take away in Bad Times. Free coffee and pizza Friday once a month to celebrate birthdays, anniversaries and our annual holiday lunches are the extent of our employee relations. We do not fund first class travel for anyone, including me, the CEO of our company. To do more would not only impact profitability; but the annual bonuses we pay our employees. In essence, any money we waste is coming out of our bonus pool, so our employees are directly impacted in their paychecks.
We take managing company money very seriously, which is usually the case with all successful companies. The process starts with the President and CEO of the company. I question all expenses and very often Just Say No. In my 33 years in business, I have seen many companies fail that did not manage expenses. Since we have been in business for more than 20 years, while many other companies have come and gone, it would appear that our strategy is the right one.
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