How to cut costs to zero (and still run your business)
In an environment where costs are increasing left right and centre, maintaining profitability is a real current challenge. So no doubt as part of the process of maintaining profitability, you will have looked at where you can cut expenditure. It’s really a question of how you look at the things you spend your money on in business – let’s look at the definitions:
CostAn outlay or expenditure of money, time, labour, trouble, that doesn’t necessarily give you a return (i.e. its dead – it doesn’t give you anything in return)
InvestmentThe investing of money or capital in order to gain profitable returns, In other words, a cost is dead. It doesn’t produce anything or help you run your business. An investment however, provides a return, and the more you invest the more return you get.
Ultimately, you want to get into the situation where you’re only making investments in your business that are going to generate a return, not blowing money on costs that aren’t helping you run your business or make more money. One of the simplest ways to assess your current spending is to look at each overhead line on your profit and loss, and put it in one of these three categories:
These are costs which don’t add value to the business, and the business can run quite easily without them in the long term.
These are true ‘costs’, and they aren’t helping you – they need to be cut straight away!
These are items of expenditure which in themselves don’t add value to the business, but are necessary to carry on the operation of the business, such as: bank charges, insurance, stationery, telephone.
These are the investments that really drive your business forward, including items such as advertising, marketing, research and development, wages (arguably a mixture of necessary and discretionary), consultancy costs, accountancy, training. You could probably run your business for a short time without spending money in these areas, but if you want to really drive your business forward, you’ve got to invest intelligently in these areas.
The focus here is about looking at the return you’re getting on what you’re spending:
- Analyse the ROI you’re getting from marketing expenditure. Find out what is generating the type of leads and customers you want, and invest in that. Don’t be scared to spend money on what works!
- Keep track of the ROI you’re achieving on research and development costs – it’s easy to get carried away with developing new products, but you must get a return
- Total salaries should be no more than a quarter of your overall GP
- Total sales salaries should be no more than 1/5 of your overall GP – this means salesmen should be 5x’ing their salary in GP
If you carry this exercise through, ultimately you’ll never spend money on a dead ‘cost’ again, but you’ll be investing wisely in view of maximising your returns.
Please note This report is provided for information only. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this report can be accepted.