Whether you’re short on cash, anticipating demand reduction, or predicting future hardships, it’s never the wrong time to consider augmenting your operating costs.
Another more positive scenario, things are going well at your Company, how could you improve profitability even more?
In the best of times, it’s easy for slippage to occur, and expenses creep up as your bottom line remains healthy.
But there are good and bad ways to cut costs. Before taking drastic measures, examine some tactics that can preserve your resources and prevent you from cutting too late or too little. Recognize the signs and plan an approach to get your production back in line.
Regardless, inspecting every line item on a regular basis is good financial discipline
Decreasing Operating Costs is not Always Smart
Low expenses sound great on paper. But like with the idea of “bad growth,” some reductions come at a cost you shouldn’t be willing to pay.
For example, a restaurant cutting the cost of many key ingredients can lower food quality and spin the establishment way below its price range. Creating an inferior product means you’re going too far, and you’ll see it in boldface when it affects your profit.
Or investing in the development of your people, might be an area to increase vs trimming your investments in training and “up-skilling”.
It costs less to keep fewer hands on deck. But that might be neglecting the big picture. You should only make changes that don’t negatively affect delivery times, quality, or the integrity of your brand. This is a simple concept, but countless CEOs cut costs in the largest areas to make the biggest impact.
This kind of thinking is short-term and impatient. Failure to consider the interplay between cost and quality can lead to disastrous consequences like losing core stakeholders. Even if you rectify the issue over time, you might have already made your bed with impressions.
Making the Right Reductions
Efficiency Improvements
Your goal is to bolster scale and productivity and virtually any cost. This doesn’t mean you can’t reduce effectively & efficiently.
Standardization, cycle time reductions, automation, and waste elimination are at the forefront of this ideology. Automation is king and is only climbing to greater heights in 2023 with groundbreaking finds occurring almost daily in AI and computer science research.
What technology could you incorporate into your Company and key processes that could positively impact your bottom line?
Some efficiency improvements will hit you with large upfront costs, including full implementation time. What short and long-term benefits are you after?
Capacity Reductions
Look at capacity if overhead is your problem. Let’s say you’re heading a customer service-centric operation, and you have four employees at 50% capacity. Removing one or two from the equation will put the other two at total or near-total capacity.
Fewer people paid more is a common and recommended approach to compensation, one that we promote to our clients at Foresight.
Cutting personnel doesn’t work in a vacuum. Examine who’s doing what, when, and how many people could realistically handle even the most integral departmental roles. This type of capacity reduction can stagnate long-term growth when handled carelessly. Don’t reduce resources that you’ll struggle to rehire.
Forget Your Reliance on Just “Spreadsheet Management”
Companies enter a downward spiral when they focus on decision-making based on expense ratios, payroll formulas, and financial targets. We need these tools and structures to make coherent decisions and plan cost reduction. But they don’t dictate strategic, holistic moves to meet goals. You do.
Stop looking to the data to produce answers in a vacuum. What considerations are in the way of executing a cut in the sales department? You’ll need to collaborate across departments to determine what moves to make next. Your situation is not caused or cured purely by financials – you’ll have to apply reasoning to the numbers to figure out what needs to budge.
BTW – at Foresight, we call this a Financial Flight Plan, where everything is taken into account with our TrueTEAM working with your leadership team to make the best data-driven decisions.
Go-To Actions to Reduce Operating Expenses
Even without a cookie-cutter solution, some strategies exist that you can mold to your needs.
- Leverage Your Team
Managers drive your departments, and they often can give you insights you wouldn’t otherwise have without asking. Have hard conversations soon and often. Challenge their ideas and let them challenge your assumptions. Cost reduction is in many cases a group effort. Having your managers’ buy-in can go a long way as you move to implement changes. - Utilize a Forecast
Stay on task based on educated guesses. But remember these are just forecasts and not one-size solutions. What are the financial results of adding costs to production and cutting customer service? Create strong models before you make moves you can’t afford to undo. - Measure Volume
This must be habitual to the point where the data is almost inherent. What do your website visits look like per month, week, and day? Tracking meetings with new clients versus closed deals seems obvious, but too many owners avoid topics like these when drafting predictions.
Do you have daily or weekly KPIs that help you to spot negative (or positive) trends early?
On the low end, your brand might be in danger and require more effort to realign. Design low and high-end targets to keep you on track and give you better ideas of where costs are happening and where redundancy lies. Are you meeting the high-end? Then it’s time to stop playing safe and start employing growth management.
Collaborate With Expertise
Outsourcing and hiring advisors can make sense for any company at any time. But if you’re already thinking of battling operating costs, it’s to your benefit to enlisting the help of a trained professional skilled in helping owners make these kinds of decisions. It might not come naturally to you, but you can train yourself to know what to look out for and when to bring in outside help.
Foresight is here to help. If you would like to begin a discussion with our CEO Kirk, feel free to use this link to Schedule a 25 Minute Discovery Call.
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