When confronted with the challenge of making more money, amateur business owners lurch for the growth lever, especially when the business is in trouble. Yet if you look at the pros, you find just the opposite… When they have problems, the first thing they do is shrink. The pros shutter divisions, reduce the number of SKUs, shrink head count, get medieval about expenses and cost reductions, and find all the excess weight they have been lugging around to accommodate growth that hasn’t happened. Why? Because trimming expenses and optimizing for maximum efficiency is not only smart, it is the fastest and most efficient path to stopping the bleeding and solving the financial problem. Don’t believe me, try to find a major company that has deviated from this formula… Can’t be done. (GM, Peloton, Bed Bath and Beyond, Blue Bell Ice Cream… It’s a very long list!)
A small decrease in expenses can have a major impact on your business’s profitability. Here’s why: If your business has a 15% EBITDA margin and you whack expenses by just 6%, your new margin is 20%, which is a 33% increase! It gets better: If your business has a 5% EBITDA margin and expenses are cut by 6%, your margin just doubled to 10%. Not too shabby for a few hours' work! Compare this strategy with trying to grow your business to produce 33% or 100% more profits… Daunting!
An uncertain economy or difficult economic conditions might force you to reprioritize from growth to efficiency. Candidly, being efficient is smart regardless of the economy because it helps prevent you from getting out of position in the event the environment changes.. This can be done with a couple of cost-reduction strategies. Keep reading to find out some of the ways you can cut business costs and save more money in the long run.
Review every bill as well as each line item on your Income Statement. With each invoice and accounting entry, ask this question: Do we “need” this or do we “want” this? If we need it, then the follow-up questions are: Can I find an alternative vendor at a better price? Can I go out to bids for this product or service? Do I need this much of it? If there is a cost that falls into the other category of “want” but is not needed, then it can be cut.
For ninety days, sign every check or personally review and approve every invoice and bill. You take over clicking the button to send out automated payments. I promise you will be amazed at some of the stuff you are spending money on that is sabotaging your financial results!
Reframe why you are spending the money to begin with. Accountants have expenses. None of my businesses have expenses… we have investments. Every check we write and every bill we pay is an investment that is designed to do one of two things:
Keep the customers we've got.
Get new customers.
The great thing about this strategy is that it forces the mentality of thinking about your return on investment (ROI). If you are spending money to keep your customers, then your repeat business (and referrals), the frequency of purchase or the size of the transaction should be stable or increasing. If the investment is to get new customers, then the ROI will be measured in terms of growth. You can utilize this strategy in connection with #1 above… If you “need it,” then the obvious next step is to measure whether or not it is yielding the appropriate return.
I realize that this idea of shrinking or discarding excess weight might be a challenge because most of us want to grow and make more money year after year without an interruption. The reality is that sometimes, the environment shifts, and we are forced to adjust our strategy to accommodate the new reality. I will remind you that screaming at the hurricane or ignoring reality describes the people who are locked up in mental institutions. Our job is to face reality and recalibrate accordingly. Do Your Job!
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