The formula is simple. You fix your bottom line by increasing revenue or cutting costs or both.
Yet, most entrepreneurs put all their efforts on the sell side only. They try to “sell their way out” of an unprofitable business. Its not necessarily the best thing to do, and not even logical at times.
Selling is unpredictable. You can’t guarantee that you will increase revenue by next month, but you can guarantee that your rent will be due. The entrepreneurial ego drives us to sell harder than ever. We cling to our expenses, believing we will need all those costs the moment we land that big client. Costs pile up predictably. Sales don’t.
Many costs are static and recurring, meaning they happen every month for the same amount regardless of your revenue. Rent, for example, is a static and recurring cost. Full time employees represent static and recurring costs. That software subscription you have, is another example. Cutting these (and other) costs have an immediate and permanent impact on the bottom line. I know it sounds heartless, but it is actually the opposite. If you don’t cut the costs for a few things now, soon enough you will have to cut the cost of the entire business. In other words, bankruptcy.
Aimlessly slashing your costs, like a bad remake of the Texas Chainsaw Massacre, is not a wise move either. Cutting the wrong costs will damage your ability to sell and service your clients, killing your revenue. So how do you cut the cost in your business with hurting it? Here are the five things to do:
1. Change The Emotional Game
Years back, Suze Orman said something so simple and so profound that it has resulted in hundreds of thousands of savings for my businesses, and will for you too. She said, “If you want to get out of debt, become more excited about saving money than spending it.”
You would think that everyone on the planet already understands this, yet as I meet entrepreneur after entrepreneur, I consistently find that most of us get more excited about spending than saving. We feel more accomplished when we brag about the 15 employees we have for our (barely) million dollar business, instead of bragging how we have three employees with the per employee revenue exceeding two hundred thousand.
If you get nothing else out of this article, change your sense of accomplishment from “more with more” to “more with less.” It is the ultimate formula for cutting costs without hurting your business.
2. Control Cost Creep
Costs are like the old anecdote of the frog and the boiling water. If you throw a frog in boiling water it leaps out. But if you put a frog in cool water and heat it up to a boil, the temperature change goes unnoticed and it dies. The same is true with cost creep.
Those once relevant expenditures, over time, have become less relevant or even irrelevant yet go unnoticed. Or perhaps the cost of certain expenses have slowly increased also going unnoticed. The costs are boiling you alive.
The fix? Print out your monthly P&L statement for each month of the last two years and evaluate each expenses. Which costs have increased over time, unnecessarily? Which costs are just no longer necessary? Renegotiate the fees. Cancel the subscriptions. Cut the costs.
3. Break Vendor Dependency
Over time vendors will increase their prices (they too are businesses, and are looking to increase their profitability). If you are exclusively dependent on them, you’re trapped.
When you first brought the vendor on, chances are you evaluated them against competitors to get the best deal. That was smart. But chances are, you are now working with this one vendor exclusively. That’s not smart. You are locked in with them. To find an alternative you need to start the vendor bidding process all over again – costing you time and money, and rolling the dice on finding a good alternative.
The fix? Find a “Ten Percent Vendor.” This is a second vendor who you give ten percent of your work too, even if your primary vendor is cheaper and better. The idea here is to have an alternative in place if your primary vendor increases your prices or can’t properly meet demand. The Ten Percent Vendor gives you an alternative. Additionally, you can experiment with different Ten Percent Vendors, until you find one that is better and cheaper than your primary vendor, and make the switch.
4. Stop Saving One By Jeopardizing All
Revisiting the comments of Suze Orman, a lot of our decision making is emotionally driven. Logic is used simply to back fill our emotional decree. Logic is used to justify expenses.
I get it. You can’t fire Jane Smith! She has been with you for ten years. While her skill set has become irrelevant, you feel obliged to keep her on board. Sound familiar?
The fix? You need to let her go. Terminating employees is one of the most gut wrenching things you will ever need to do as an entrepreneur. The justification of waiting just one more pay period, just one more week, or just one more year, because things will “turn around,” is easy to do.
Delaying the decision allows you to avoid the pain of terminating her. But like a hole in a ship, if you don’t take care of the leak, the entire ship will sink. Realize that your willingness to delay the termination of one person, is also a willingness to compromise the job of everyone at your company.
Also realize this. If Jane is not working out for you, you are probably not working out for her either. A better job is out there for her, yet your ego is preventing her from finding something that is better for her.
Tear off the band-aid. It will hurt in the moment, but the company will benefit from it.
5. Annualize The Small Recurring Costs
Have you ever watched an infomercial where they reveal the price as “only” three, easy payments of $29.99? It doesn’t sound so bad, until you realize that is represents almost one hundred dollars. Many companies, perhaps yours, has perceivable small monthly costs that when annualized are awfully big.
The fix? Look at all your monthly recurring costs, such as your wireless phone, your internet access, your rent, your employee’s salaries, everything. Now multiple each cost by 12 to determine your actual cost. Which costs can you replace with free alternatives? Which costs can you just cancel? Which costs can you renegotiate?
6. Compare Apples To Oranges
Do an apples to oranges comparison for all your costs, including the recurring costs. Instead of comparing Jane (apples), your full time office manager, with Mark (to apples) a less expensive office manager, consider a shared office management contractor (oranges). Cutting costs isn’t always an either/or decision. It is often a consideration of many alternatives.
That should be more than enough to get your started. Go forth and start cutting those costs.