The measure of a good business that aspires to be profitable is to generate revenue and limit costs. In times of market prosperity, cutting costs is often placed on the back burner in favor of focusing on gaining new business. In economic times that are less favorable, businesses need to focus on cost-cutting measures almost as much as creating additional revenue. In some instances, cutting costs are the equivalent of gaining a revenue boost.
People Placement
1. Utilizing your employees to the best of their abilities is one way to cut unnecessary costs. When employees are placed outside of their position of strength, the time-cost ratio of productivity lowers. For each hour that an employee is on the clock, a cost is being incurred. To minimize the cost the company incurs, people need to be in a productive role for as much time as possible.
According to the Gallup Organization, there are three groups of employee categories: engaged, not engaged and actively disengaged. Their research has indicated that “29 percent of the U.S. workforce is actively engaged, 55 percent is not engaged and 16 percent is actively disengaged.” Their conclusion is that 71 percent of people who go to work every day aren’t engaged in their jobs, meaning that most U.S. businesses are operating at about one-third capacity.
Figure out who your engaged and disengaged workers are. Work on improving the level of production from the disengaged group by attempting to place them in a more engaged atmosphere. They might just be placed in the wrong role. If you cannot improve their productivity, let them go and expand the role and pay for your engaged employees. You will save scores of hours in nonproductive labor hours as well as medical and retirement benefit. As a company, you will save more money by increasing the pay of high-performing people than by having two people at half the cost splitting the workload. Cross-train your employees and allow them to perform multiple functions.
Keep in mind with cost cutting, if you run 10% profit margins, $1000 a month saved is the equivalent of $10,000 a month in sales. This is HUGE stuff!
Marketing Budget
2. The marketing budget can be reduced by breaking down the way you attempt to communicate with potential clients. If you are currently utilizing a program that is not yielding a sizable revenue production, cut it loose. Do not engage in marketing efforts that do not generate new cash flow. Just because a competitor is utilizing a specific avenue for revenue generation does not mean you need to join in. Look at your cost of advertising and compare it the amount of new leads it generates. From these new leads, how many end up becoming clients? If you don’t know these details, start to track them immediately. This will tell you where to spend your marketing budget dollars. You must know thy business!
Understand Cash Flow
3. A surefire way to deter wasteful spending is to maintain a current cash flow statement and projection, says Jack McSunas of SCORE® Counselors to America’s Small Business, in Orange County, Calif. “That doesn’t prevent poor choices in how your money is spent, but at least you are planning for the expenditure,” he says. You have to have a handle on your cash flow as a small business, I check mine every day.
Companies, especially startups, often try to gain market share rapidly by making too many purchases in an effort to compete with the big players. They purchase too much equipment and supplies without first having the business (revenue generation) to justify it. They operate under the mindset that the supplies, employees and equipment will gain new business. The best way to run a business is the opposite. First go get the business, then hire the help or purchase the necessary supplies only as necessary.
Determine the amount of new revenue influx that makes it necessary to hire a new employee. If hiring someone new creates a break-even or loss scenario with the new revenue streams, the hire is not a good idea. Only hire people when the offset differential is a positive cash flow. Use this same strategy when purchasing new equipment or new supplies. You must understand the dollar figure that is required when making any acquisition.
Look at your costs for energy, office supplies, phone costs and travel. Determine where you are spending more than what is actually necessary.
A special thanks to Ralph Smith who provided most of this information.
