Cutting costs can make your business less profitable

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When a business hits hard times, many small business owners will focus on cutting costs to turn their fortunes around and maintain their profits.

Not all costs are made equally though and cutting some costs can ultimately lead to making less profit instead of more.

During my years as an accountant I saw this pattern often and I was even part of the decision making process to make those cuts. As a business owner focused on profitability, my decision making process is very different.

To turn things around during those hard times you must shift your focus from reducing costs to increasing revenue. Cost savings are ultimately limited, we only have so many we can cut after all, however on the flip side your ability to increase your revenue is uncapped.

Whilst every cost should be assessed based on the return on investment (ROI) it will give you (in good times and bad), here are four costs that are commonly cut early and that can in fact adversely affect your profits.

Marketing

To increase your revenue you will very likely need to first increase the number of leads coming into your business and this is where marketing comes in.  

Marketing lets potential customers out there know you exist and helps to lead them to the top of your sales funnel. Once prospective clients find you, marketing then also helps you to interact with them, add value to them and build trust and rapport with them. We do all this in the hope that at some point, if you are able to help them to solve a problem they have, that you will do business together.  

Depending on the business, target market and marketing strategy, the path from marketing spend to converted client can take time and therefore it makes it tempting to pull the plug when times get tough.  

However, without a steady flow of leads into your business you will stunt the growth of your business at best and it will put you out of business at worst.

Staff

Letting go of staff is never something that business owners like to do, however for many businesses they can be a substantial percentage of their total costs, especially in professional service businesses.

When you are focused on cost cutting instead of increasing revenue to maintain your profitability, letting go of staff can seem like the only option.  

The reality is though that often you let go of good people that are hard to replace and that you have invested a significant amount of time and money into hiring and training.  

Not only must you consider the affect on moral and in turn productivity it has on the rest of your team, when you are ready to rehire again you will have to incur the costs all over again, which will affect lower profits.

Training

Investing in training and education can be seen as a luxury in harder times. However if you have skills or knowledge gaps within your business, you will not move forward unless you fill these gaps.

If you keep doing what you are doing in the same way you have always done it, then it follows that you can expect to get the same result.  If you want something different for your business then you have to do something different and that often means investing in developing new skills for yourself and your team.  

Imagine for a moment you have a team member that has skill gaps in your customer service or product delivery team. Unhappy customers will talk with their wallets by taking their business elsewhere.  Not only will you lose the income from that customer, you will also have to go to the expense of finding a new customer.  

A 5% reduction in the customer defection rate can increase profits by 5 – 95% – Bain & Company.

A reduction in any cost that leads to your customers defecting will harm your bottom line.

Travel

Business travel is most often used for meeting new customers or servicing existing ones, both activities are aimed at increasing your revenue.  

Technology is great for helping us to stay in contact with more ease, but there is nothing quite like a face-to-face meeting to build relationships and seal the deal.

Grounding your sales team could have a detrimental affect on your ability to win more business.  In fact Oxford Economics USA completed a study in 2009 during the GFC, about the return on investment (ROI) of US business travel. They found that where business travel is curtailed, an average business loses 17% in profits in the first year and then takes a further three years to get back to it’s previous profit levels.

Claire Whitelaw Brown from CWB Business Growth Strategies is a business strategist who specialises in supporting business owners with big, audacious goals determined to turn them into reality.  To receive a complimentary strategy session with Claire, simply email her with the title “Fresh Perspective”.

 

Claire Whitelaw Brown from CWB Business Growth Strategies is a business strategist who specialises in supporting business owners with big, audacious goals determined to turn them into reality. To receive a complimentary strategy session with Claire, simply email her with the title “Fresh Perspective”.