Cost Reduction - Part 3

Know your costs


In order to cut costs strategically you must first know your costs. You must be able to see what your costs have been over time and hopefully have a plan for the future.

Knowing your costs is sometimes easier said then done, often the overworked business has not implemented the systems necessary to know their costs and plan them strategically. Quite often small business owner/managers busy themselves trying to hire, train and retain capable bookkeeping staff, rather than analyzing their costs and the strategic effects of these expenditures on the business. If you need help implementing systems to track and maintain your costs, while cutting your costs and freeing up your time to strategically understand your costs CLICK HERE.

Know Where You're Going

Once you have implemented a cost tracking system and you have freed up your time to strategically plan for your company you need to create your plan. Strategy demands that you express clearly the results you intend to achieve. Two things are important here: a) Have the end result in mind before you start, and b) For clarity, quantify that end result.

Strategy needs to be articulated into quantifiable results. With respect to cost reduction, ask yourself what level of profitability are you aiming for? Write it down and refer to it often.

Cost reduction is only a means by which you can increase profits. Cost reduction is not the end result you want; increasing profits is. So don't lose sight of this important distinction. It can have a major impact on the effectiveness of your strategy.

Finally, you must thoroughly understand the ramifications of your decisions, before you make them. It is difficult when you are a busy small business owner to take the time to strategically plan for your company, but it is a step that is imperative to your long-term success. This is the work that keeps you in business; it is planning and organizing the steps you need to take; it includes clearly defining, measuring, and tracking your results. It is precisely this planning that will help you get the result you want increase profits and insure your business success.

In the future installations of this series (coming soon), we'll take a look at some of the tactical steps you can take once you've determined your overall strategy. Stay tuned!

Cost Reduction - Part 2

Consider the Big Picture


Let's examine more closely why looking at the big picture is so important. For starters, the big picture gives you a wider view of your market and your business.

Clearly, good strategies are critical to making good business decisions. Poorly conceived strategies can haunt you. In bad times, strategies such as "slash and burn" are employed by the well intended business owner trying to save their. But, be careful.

The slash and burn approach is short term. It is reactive in nature and characterized by the wholesale cutting of people and programs across the board, without much consideration of the consequences. The approach is reactive because it comes from no strategy at all, other than cutting costs. Hence, the tactic often achieves a positive short-term effect on earnings, but commonly leads to disastrous long-term results. Why? Because short-term cutbacks are, for the most part, unsustainable.

Cost Reduction Part 1

In this tumultuous economy, reducing operating expenses has emerged as the number one objective for business owners everywhere. So what are operating expenses? Operating expenses (also known as operational costs, fixed expenses, and indirect costs) comprise the expenditures that a business incurs as a result of performing its normal business operations. These expenses include rent, phone, utilities, fixtures, equipment, inventory, marketing budgets, insurance, payroll, professional services, etc.


This article is not meant to be a step by step plan to reduce your operating costs, but to stimulate thought about how your Company can reduce costs, increase profits while not losing its strategic focus.

So let's look at operating expenses strategically and some of the reasons you may wish to reduce them.

1. In this tough economy many are cutting back which may reduce demand for your product

2. Your losing money and need to get back on track to profitability

3. Your business is profitable but not profitable enough to meet your strategic goals

Circumstances for cutting operating costs vary, but cutting some of them, or all of them, can be risky. To do this correctly and maintain your strategic goals ask yourself the following questions:

• If I/we don’t spend this money can the Company still compete effectively?

• If I/we don’t spend this money will the quality of our product be diminished?

• If I/we don’t spend this money will our clients' experience with the company be reduced?

• If I/we don’t spend this money will the goodwill you have worked so hard to build be reduced?

You need to consider your company and the market in which you compete while making these decisions.