5 Steps to Better Cost Cutting for Your Business

I can remember the moment so vividly, you would think it was yesterday. I am speaking of the first time it occurred to me that I had to exercise better fiscal responsibility to achieve the results that I yearned as a business leader. My business had performed admirably from a revenue generating standpoint for several quarters. I focused 90% of my time and energy on growing the business. The problem - not only was I personally ignoring the profit and loss metrics, but I had failed to delegate the responsibility to a trusted team member.

The month in question, was October, the first month of our fiscal fourth quarter. The team had generated a 27% month-over-month increase in sales, so, naturally, I was ecstatic at the prospects of flowing most of those revenues to the bottom line. It was the 9th of November that I finally got around to reviewing the financials and realized that instead of yielding a tremendous profit, we had yielded a net loss of $20K for the month. Not only did we not flow the additional sales revenues to the bottom line, but the expenses that we had incurred had exceeded the revenues we had generated. It was this gut-punch moment that made me realize that we had to remedy the problem.

Here are the 5 steps that we took to better manage our costs.

1. Set realistic budget with revenues tied directly to expenses

Our postmortem revealed that our budget for that given month was not realistic from an expenses standpoint and, as such, presented a much rosier financial picture than the reality. Further examination revealed that the business levels for the month of October brought about additional travel expenses as well as an additional 10% increase in labor expenses than previously budgeted.

2. Use a daily/weekly forecast model to stay focused on the task

To further exacerbate the problem, the budget was created in February but was never adjusted for the more costly or rather less profitable business that we had garnered in late August for October. Not only did we fail to update our forecast at the start of the month, but we also neglected to track and compare our expenses to our actual weekly revenues. This step would have allowed us to make short term expense adjustments to minimize the damage. This was like going on a trip for the first time without Google maps.

3. Deal with the bad news, do not delay the inevitable

Dealing with the bad news head-on or, rather, the failure to do so can be the demise of a small business. What does that mean? Let us explore for a minute. Let’s say you set a budget at the start of the year to generate $1M in revenues and $500K in expenses. As you move through the month of March you realize that you are $200K behind your projection and $150K of the shortfall to projection should have actualized in the first quarter. This is when business leaders review the sales pipeline, sales strategies, and other relevant metrics to determine if the $200K delta can be realistically mitigated. If the answer is yes, then it may cost more than the originally projected $500K in expenses to service the business. If the answer is no, then the leader must make the necessary adjustments to expenses or be fully committed yielding a diluted profit margin. Regardless of the decision, it is always better to enter any challenge with eyes wide open.

4. Be discriminating about the business you chase

One of the most impactful blows to our October profit margin was the amount of work (labor hours) that it took to service this new business. Having a realistic cost of business figure allows the business owner to optimally price their services. Knowing your breakeven on any business and your projected profit margin is crucial to business success. There are times when the business leader must make the decision to walk away from the business due to the lack thereof or the meagerness of the profit margins.

5. Learn from past experiences

Learning from experience involves spending the time to uncover the root cause. As an example, a business owner may decide to service a piece of business with a 10% profit margin because of the dividends that being associated with that client could potentially yield. These types of thoughtful business decisions are completely understandable. The problem occurs what the team fails to adhere to the agreed upon service requirements and exceed already slim-budgeted expense expectations. The failure to follow the forecast in these circumstances could dilute or erase any potential profits.

Labor is typically the costliest expense to a business; therefore, business leaders must ensure that their teams are maximizing work efficiency by reducing or eliminating redundancies or as we would say, “doing it right the first time”. Training and careful planning, as well as supervisory support and guidance pays major dividends in any work-related process.