Focus on Profit, Part 1: Decrease Costs

cost cut

Why do people think profit is a dirty word?  I love the book Profits Aren’t Everything, They’re the Only Thing by George Cloutier.  George, who I met several years ago at his summer home in Nantucket, discusses why profits are such an important component of any business.

As business owners, we have tons of challenges:

  • Motivating the team (keeping all oars rowing in the same direction)
  • Taking care of customers
  • Forecasting production to meet anticipated customer needs
  • Marketing our products
  • Administrating a myriad of daily details like answering email, returning phone calls, and keeping paperwork up to date.

ALL of the above factors contribute to the “bottom line,” or profit.

And despite the hesitancy about the word, (“All those companies are just out for profit!”), profit is actually a GOOD thing. Profit is necessary for your business to be able to hire the best employees, develop effective marketing strategies, provide excellent customer service, and serve people for years to come, including making donations and helping to fund community service projects that align with your values.  In reality, when you drop prices to satisfy a few customers (or even one) you’re hurting other customers, your employees, yourself, and those you could potentially give to.

Most businesses I see don’t have profit as a forefront objective.  They seem to be in business for another reason. If that’s you, I suggest you re-think your opinion of profit.

Some businesses already realize that profit is beneficial. Maybe that’s you, and you want to increase profits. There are really only two ways to do so.

Increase revenue, or reduce costs.

That’s it.

The main role of a business owner and/or the company CFO is to be looking for ways to do one of those two things (or both.)

With cost-cutting, if it’s up to you alone, I recommend cutting and asking questions later. Rip the bandage off. I’ve made the mistake of overanalyzing cost reduction numerous times.  Your first instinct is usually your best. It’s proven that snap decisions are often as good as decisions that you took a long time to agonize over.

If you have to get group consensus, make sure you get the right group together. Gather as much data as you reasonably need, but don’t overdo it. Let everyone contribute their thoughts. Then, make a decision.

Be relentless with cost-cutting. Go through each line item. No item is too small.  Looking at the smaller costs helps breed a cost-conscious culture. Ask questions like,

  • Do we really need to be paying every employee’s full cell phone bill? (In the early days, when people had a private landline or cell phone, businesses would feel the need to provide a separate phone for business use, or reimburse employees for cell phone use for work. Now, there’s very little distinction and even kids have their own cell phones.  It’s become a personal choice and expense to have one. Most people would keep their cell phone even if they left your employment. So is it truly up to you to pay for one now?)
  • Do we need to continue using that vendor? Are there others that are more cost-effective?  Your suppliers are often the easiest place to reduce costs. Ask for more discounts or better pricing and terms.
  • What other perks are not completely necessary? I know of one company that provided coffee and soda for their office employees, without charge. While I don’t have a problem with some break room supplies, was it necessary (and arguably, even healthy?) to provide an unlimited supply of soda to the employees?

I know these are hard questions. And I’m not trying to be a mean guy.  Cost savings can be used for a better purpose, like employee training, increased salaries, improved marketing and growth–and maybe even–bonuses?  Ask your employees if they would be willing to give up cell phone reimbursement for the chance to have a bigger raise or increased bonus potential. You may be surprised by what they say!

Next time, I’ll share some thoughts about increasing revenue.