Cost Cutting

Most business consultants will tell you that they can help you cut costs in your business. That’s a fairly bold statement. I can certainly tell you that I could come into your business and show you ways to reduce your business expenses. I’ll bet I can save you more than enough to justify my fees. A classic example is the old:

“Do you know how much money you’re spending on coffee?” It’s costing you $5 (or $10, or $20) a day to provide coffee for your staff. Let them buy their own coffee. You’ll save $25 (or $50 or $100) a week; that’s $1,250 (or $2,500 or $5000) a year!

Well, that consultant is a real bean counter. And I don't mean coffee beans!

He doesn’t know the difference between cost and value.

  • How much time will be wasted by your people going out to buy coffee? Or arguing about a coffee pool?
  • How will your people feel about their cost-cutting boss?
  • How much are your average daily sales per employee?
  • Will their attitude to customers change?
  • How much will your ticked off employees cost you?

I’ve run my own business. I’ve hired and fired employees. I know that people like to feel valued. What message does the (coffee) bean counter approach send them?

A much tougher cost cutting question is:
How much money are you spending on ineffective advertising? Your books will tell you how much you’re spending in total on advertising (cost); but are you getting value from each type?

My General Approach

You sign the cheques (or invoices), so you know what your costs are. You don’t always know if you’re getting value, but you have a pretty good idea if you’re wasting money.

I believe that you’re much better off selling more of the right products than just cutting costs.

Example:

Gross Margin 50%
Sales 100
Cost of Sales (50)
Gross Profit 50
Fixed Expenses (30)
Net Profit 20

If you slash expenses in half, you’ll make another $15 profit.
Increase sales by 30%, and you also make the $15 extra profit.

Which scenario is more likely?
Do you think you’ll be able to halve your costs?
Isn’t it easier to increase sales?