Make costs sustainable

I'm a day late with this post. There was just too much going on last week, but here we are. This post is the third in a series of four that started with The ride's not over (so get busy). Things are not going to get better all by themselves. You need to accept that and embrace this time as an opportunity to build a stronger business. That involves developing new products and services to address changes in your market and customer base. It also means making costs sustainable.

You need to make sure that your overhead can be covered at current revenue levels. If you can't turn a profit in this market, after a year and a half of dealing with the recession, you really need to make big changes. You can make those changes now and have a profitable year or you can struggle to make ends meet hoping a recovery will save you. It won't. 

When cutting costs the first thing you must do is separate your cost of goods sold from your overhead. Without this distinction you can easily shoot yourself in the foot, and you'll never be able to calculate your break even point. That's a topic for another day, but for now just know that you need to be able to classify your costs into these two categories.

Cost of goods sold are the costs related to delivering your product or service. In a manufacturing company these costs are raw materials and labor required to produce finished goods. In a retail environment these are the costs to buy product as well as the costs of packaging and in some cases sales floor labor. The thing to remember about costs of goods sold is that they increase as your sales increase. Rent does not go up if sales go up so it's not cost of goods sold.

Everything that is not cost of goods sold is overhead. Rent, utilities, insurance, manager payroll, phones...the list goes on but you get the idea.

Now take a hard look at each overhead item and ask yourself these three questions.

1. How would business change if I cut back or eliminated this item for the next 3-6 months?
2. What actions could I take to make sure those changes actually benefit my business?
3. What is the earliest date and time I can make these changes?

Note that you can make changes to EVERY overhead item. The hard part is determining how those changes can actually benefit your customers and your business as a whole. Here's an example.

A retail store is spending $4,690 a month in rent. The only way to reduce this cost is to find someone to help share the space but the space is not easily divided. They call one of their best speciality suppliers and make the following offer. Pay $500 a month for an exclusive spot in the jewelry section where the supplier can setup their own display, staff it with a sales rep when desired and split the retail profits 50/50 with the store owner. The supplier will also be responsible for maintaining their own inventory.

In this case the retail store is able to lower rent by over 10%, increase sales staff at no cost, recognize a one time cash increase of about $1,500 as inventory that sells does not have to be restocked, and they strengthen ties with one of their best suppliers. The vendor gets exclusive access to the store's customers, is able to introduce new product in a controlled environment, does not have to deal with expensive returns of unsold inventory, realizes higher profit margins on sold product and strengthens ties with one of their best customers.

Making costs sustainable isn't just about cutting. It's about making strategic choices that lower costs AND benefit the business. Too many companies get caught up in an either/or mentality when they can actually find a both/and solution with a little help.