Business is cyclical. Sales rise and fall. The companies best placed to deal with the cycles are those with the muscle to flex and no fat to burden agility and speed. Companies flourishing through a positive cycle sometimes forget the reality of markets and competition: Nothing lasts forever. There are outsized examples of hubris. One is Eastman Kodak. Founded in 1888, Kodak enjoyed more than a century of dominance. Overwhelmed by advances in technology that made core products defunct and a vast cost structure that supported sclerotic product lines, Kodak filed for Chapter 11 bankruptcy protection in 2012.
There are innumerable lesser examples: The retailer of video games that sells only through a storefront and buys inventory at the same, so-called wholesale price that consumers pay retail via the Internet. The Main Street vendor of household goods with no online click-and-order facility whose suppliers sell direct to the market through their own distribution network and B2C advertising. Too many companies still rely on the old model — a full-time, inflexible staff expected to anticipate and deal with every development in technology, marketing, distribution, supply chain and the competitive environment, meanwhile occupying fixed facilities and, in all, absorbing overhead costs whose trajectory can only rise. What a company can *always* manage are costs. That’s a powerful proposition, and here are six important principles:
IT’S A BUSINESS, NOT A FAMILY
You’re in it to make money. Unless your business is truly a family business and employing only family members, you can’t be sentimental. Don’t be telling employees, “We’re all a big family.’’ Families are supposed to stick together, regardless. Strangers aren’t. This is the only rational and commercially viable starting point if costs are to be managed. Be open and frank about the employer-employee relationship.
DRAW A DIRECT RELATIONSHIP BETWEEN PROFIT AND COSTS
It’s weird, but many companies don’t. Costs, and their planning, should be a function of profit (or of how to narrow a loss). Don’t be thinking profit is there to support costs. That’s real cart-before-horse reasoning. First and always comes this notion: generate sales and profit at the lowest possible cost to the company. Companies that put in place a cost structure and then have to figure out how to support it are likely to die trying. Software like Power Bi and Tableau can help you manage and track these things, and find areas for improvement.
THERE IS NO COST THAT CAN’T OR SHOULDN’T BE MANAGED
Nothing is sacrosanct. Just because an expense is “fixed’’ in the management accounts doesn’t mean it’s never to be touched. We have choice and there is competition. The quantum of overhead is a function of executive decision-making and not simply an inevitable burden. It’s inertia or failure to explore alternatives that bloat expenses.
JUST BECAUSE YOU’RE BEARING THE COST DOESN’T MEAN IT’S WORTH BEARING
Do you really need to be paying for all those things? Travelling to meetings. Using landlines or mobile phones instead of Skype. Ritually increasing pay every year. Distributing bonuses. Sticking with standard work weeks, at eight or nine hours a day. No, you do not. Clean-sheet the business. Forget “this is what we’ve always done’’ and “it’s worked just fine up to now.’’ Pay only for what you need. It will be less than you’re used to paying, guaranteed.
IF YOU DON’T REDUCE COSTS, SOMEONE ELSE WILL, AND THEY WILL UNDERCUT YOU
Companies compete on all kinds of fronts, including service, product and price. If you occupy that very narrow, golden band of businesses which offer goods and services that are almost impossible to replicate, you have significant control over price. If you don’t, a lever you must exercise is the cost of production. Pull it hard and without hesitation. Get used to operating with discipline, regardless of the cycle.
FULL-TIME HEADCOUNT OFTEN ISN’T THE ANSWER
In a world where technology allows anyone with Internet connectivity to produce and communicate instantly, knowledge is everywhere, available for anyone who cares to look for it. Independent contractors, management consultants and experts of every kind are out there, globally. At a small slice of the cost of employing or sustaining a full-time staffer, they can provide answers and plans on finance, marketing, costing, distribution and every other aspect of business. Use them. Pay less, and get more and better insights.