YOU CAN CUT 10% — BUT WHAT WILL IT COST YOU?

Don’t cut what grows –

Protect Capacity, Protect Customers, Protect Tomorrow

When profitability gets tight, one of the first questions leadership teams often ask is:

“Where can we cut costs?”

It makes sense. Expenses are visible, measurable and largely within management’s control.

And in many businesses, finding the first 5–10% isn’t particularly difficult.

The problem is that cutting costs and improving a business are not necessarily the same thing.

The Low-Hanging-Fruit Trap

When leaders are under financial pressure, they naturally migrate toward expenses they can eliminate quickly.

Marketing gets reduced. Open positions aren’t filled. Training is postponed. Maintenance is delayed. Overtime is restricted. Inventory gets tightened. Technology investments are pushed into next year.

Each decision can be justified individually. And the next financial statement may even look better. But businesses don’t operate as spreadsheets. Every expense connects to something else.

·       Reduce staffing and customer response time may increase.

·       Reduce inventory and product availability may decline.

·       Reduce maintenance and downtime may increase.

·       Reduce marketing and the sales pipeline may weaken.

·       Reduce training and productivity or quality may suffer.

The real question isn’t: “How much money will this save?”

It’s: “What happens elsewhere in the business when we remove this money?”

You May Be Cutting Growth Capacity

Imagine a company generating $10 million in revenue decides it needs to dramatically improve profitability. Leadership finds $500,000 of expenses to eliminate.

Success? Maybe.

What if those reductions also decrease the organization’s capacity to sell, produce or service another $1 million in revenue? The $500,000 savings suddenly looks very different.

This is where financial management becomes a leadership issue.

Anyone can look down an expense report and start crossing things out. Leadership requires understanding the second- and third-order effects of those decisions.

Maybe You Don’t Have a Spending Problem

There is another question leadership teams should be willing to consider:

What if we don’t have a spending problem?

What if we have a revenue problem?

A business with the people, equipment, systems and infrastructure capable of supporting $12 million in revenue — but currently generating $9 million — may appear inefficient.

Cutting capacity to fit $9 million might improve short-term margins. But it may also permanently reduce the organization’s ability to reach $12 million. That’s why cost reduction cannot be separated from growth strategy.

Put the Customer in the Middle

Before making a significant cost reduction, leadership should trace the decision all the way to the customer. Ask: If we remove this expense, what changes for the customer?

Then keep going.

·       Does response time change?

·       Does availability change?

·       Does quality change?

·       Does reliability change?

·       Does the salesperson have less support?

·       Does the employee serving the customer become overloaded?

·       Does the customer have one more reason to choose a competitor?

Not every expense deserves to survive this examination. Businesses absolutely accumulate waste, unnecessary complexity and spending that produces little value.

Cut it.

But distinguish fat from muscle.

And never confuse a lower expense number with a stronger business.

The Better Leadership Question

Instead of beginning every profitability discussion with: “What can we cut?”

Try beginning with two questions: “Where are we spending money that doesn’t create value?”

and

“Where are we underperforming our revenue capacity?”

Those questions create a very different conversation. Because sometimes you need to spend less. Sometimes you need to sell more. And sometimes the worst financial decision you can make is saving money in exactly the wrong place.

Cutting costs is easy.

Protecting the organization’s ability to grow while doing it — that’s leadership.