The ‘Gut’ reaction when a business isn’t profitable is to cut costs. The unintended results of cost cutting may be reduced product or service quality, cash flow shortages or further erosion of profits & margin. Let’s take a ‘widget maker’ with two or three employees. He is looking for a way to improve profitability on the widget with wheels. He has determined that there are three (3) cost (expense) cutting options…
- Eliminate administrative/finance headcount
- Eliminate direct product headcount
- Reduce direct product costs
We will review the options & impact it may have on your business.
Option 1 – Eliminate administrative/finance headcount
If you have spent any time as an admin or finance colleague in industry you will learn that you ‘aren’t a revenue generator’ therefore the first to see an ax to your budget. It is determined the admin/bookkeeper can be eliminated & the owner will take on the function. How hard can it be? The realization over the upcoming weeks is the bookkeeper invoiced customers weekly, chased customer payment, maintained vendor relationships, paid vendor invoices weekly & managed payroll bi-weekly. Suppliers are refusing future shipment without payment; the credit card has been frozen for non-payment & customers are slow to pay because no one has been following up regularly to confirm payment. The cash on hand is not enough to cover payroll on Friday. Lesson learned.
Option 2 – Eliminate direct product headcount
As a business owner, you determine that savings can be found in cutting headcount. Cutting headcount is never a popular option for the employer or employee but the apprentice widget maker is let go from the business. The apprentice was preparing the individual pieces for assembly & the senior was assembling. Removal of the apprentice results in the senior preparing & assembling all product & results in a reduction of production each day by one third. Reduction of daily production affects the ability to fulfill customer orders in a timely fashion. The product cycle is increased by 2.5 days. The result to the business is customers wait an additional 3 – 5 business days to receive their order. Customer is less than thrilled to wait this long. In an instant gratification society, an additional 3 – 5 business days to wait for my widget with wheels to arrive is an eternity. Customer may think twice about ordering from you in the future.
Option 3 – Reduce direct product costs
After countless hours researching on the internet, you find a manufacturer of ball bearings & the ball bearings can be procured with a significant savings. The new bearings are used in production & shipped to customers. Customers begin to flood your Facebook page with complaints that your product is garbage because their widgets with wheels are broken. Turns out roughly one third of your shipment of ball bearings was damaged. The direct cost to the business are countless hours spent rectifying customer complaints with returns & replacements & a new social media marketing campaign launched to keep the angry internet trolls from destroying your business. Keep in mind that in today’s market disdain for your product or service can burn across social media like wild fire in no time.
Do you have a revenue plan?
The real opportunity for profitability is in developing a revenue plan. Take the data collected from a cloud accounting system & add-on CRM (Customer Resource Management) system & analyze the information already on hand. What are the marketing expenses? Are the marketing sources driving revenue? Who are your existing customers & how did they find you? What is the mix of products sold? What mix of products do I need to sell to meet revenue goals? The list is not inclusive but all are questions that can be answered by digging into the numbers & data in your financial systems.
Talk to your accountant & trusted business advisor about developing a revenue plan to increase your revenue & profits.
If your accountant doesn’t offer revenue planning services we can help. You don’t even need to be in the same part of the US… we can work with you from anywhere. With real-time cloud accounting access, your accountant & trusted business advisor located anywhere in the world can help you operate, understand & grow your business rather than just adding up the numbers.