If You Cut Your Costs To Zero, That Is What Your Business Will Be.

Step Back And Get A Better View

So what is more important, making more money or having the lowest costs?  Every business owner takes a different approach to managing the finances of the business.  If you read the business section of just about any paper, there is some one talking about how to reduce costs, or some executive blaming higher costs.  Generally when I work with business owners, I have very little influence on cutting costs so I focus on how to make more money with what they have.

Recently while talking with a business owner we were planning out his income target for the next year.  As I started going through options for making more money, he turned the conversation and focused on overhead costs.  I tried to redirect him, and like many owners he felt that growing the business would "cost too much."  He was sharing his amazement at how much his payroll was costing him.  The people were one thing, but when you add in the unemployment, Social Security Taxes and Employer Taxes, the numbers where really starting to bother him.  He was telling me about how his payroll was going to kill his business if he didn’t find a way to cut back.  

If you have employees in your business you know how expense hiring really is.  But proper hiring wasn’t why we were talking.  He wanted to brainstorm some ideas to increase his income and yet he decided to focus on how to reduce his costs, including payroll.  You see this in the business section all the time.  There are complete business cycles where profits are increased by cutting costs, reducing maintenance and then a new boss comes in to buy new equipment and start the badly needed maintenance program.  

After talking a little longer I reminded the owner that there are only three ways to make more money, and none of them have to do with decreasing costs.  He pressed forward so I let him continue and was reminded of a lesson a very wealthy man shared with me.  

Tony, who ran a beverage distributor and I were out on the golf course one day and he said “Scott, do you know how I really make money?”  My puzzled look must of answered his question so he continued.

Tony told me about one of his work vehicles having a major breakdown just days after the warranty expired.  The repair was several thousand dollars.  Tony went down to the dealer and politely asked that the dealer back him up and have the manufacturer cover the new transmission under warranty.  They did.

The relationship that Tony had built with the dealer over 15 years paid off.  Tony made his money by keeping up good relationships with his vendors and being brutal with his expense monitoring.  Not one penny went across his desk without a reason.  He ended the conversation saying that if he walked away, and no one else monitored expenses, all of his profits would be gone in less than a year.  All of his profits were about equal to the expenses he was able to prevent.

None of this leads to making more money per se.  What cost cutting might do is increase margins giving the image of making more money with less.  Tony had the right idea about preventing unnecessary expenses being very important to the business.  Uncontrolled expenses can kill a business without a doubt.

The problem with spending to much time on cutting costs, is you might cut costs that cost customers.  If you do like Tony and spend most of your time focused on increasing your customer base, and the rest of your time focused on managing expenses you will likely have a much better business.  

At the end of the day, a business must make money to exist.  The trick is to bring in more than you spend to get it, simple as that.   You can cut all of the costs you want, but if you don't bring in the money, costs won't matter anyway.