Stop cutting costs, until you know what you are building
Running a business is about making money, not minimizing cost.
Yesterday I was speaking to a CFO who's company had doubled revenue over the last 18 months, but wasn't making any more money.
So they are cutting costs.
That sounds reasonable. But talking to the CFO highlighted that the company didn't have a vision for the future. They didn't fully understand their differentiator and they didn't know how exactly they would grow.
So how can he know what costs to cut?
Cost / expense management matters. I am a big fan of zero based budgeting and ensuring that money being spent is tied to some sort of return. But effective cost management requires clarity and focus on where the company is going, not just reducing expenses.
To manage costs a company must first understand the source of value. What products will be successful? What customers add the most value? What spending is driving long term returns?
So cost management requires:
A clear vision of the future and what the company is building. This vision will require some foresight and thinking about the future of the market and the business. It will define what the business is and what it isn't. The company may need to invest in what it is building, but can cut what doesn't fit.
Control of the numbers and clarity over where money is being made and what is driving costs. Many companies, even some of the worlds largest, do not have this information. But making good decisions, especially cost decisions, requires a thorough understanding of what products, customers, regions and any other segmentations are making money and which ones are not.
One client in the interest of cutting cost wanted to eliminate an expensive product headache. But that headache had a 50% year on year growth and a 45% margin, which was better than any of the alternatives.
A strategy / plan for how to achieve the vision. This clear plan of action with metrics, guides spending and allows management to measure the impact of that spend. Spending that is yielding results should continue - spending that isn't, should stop.
Not all costs incurred today will lead to results today. Businesses do need to invest, they do need to take action today for a result tomorrow. Clear objectives and a clear strategy ensure that those investments deliver results. Cutting costs without them is a quick path nonexistence.
Stratist helps our clients create a vision for the future, a plan for growth and a cost program that makes sense. We start with our four to eight week engagement, analyzing our clients' numbers to discover what is working and what isn't. With a comprehensive strategy we can often save significant cost and enhance cash flow while providing a platform for the future.