Cutting costs: maximizing results

June 8, 2016

 

We all have to live on a finite amount of money. We all have to live and run our businesses in a manner, that at least doesn't lose money. But, if we are not careful, money becomes the only motivator. So let's take a quick look at costs, how to minimize them, and how to maximize results.

 

What types of costs are there?

 

- Monetary

 

- Effort

 

- Switching

 

- Time

 

Obviously there are others that can be included, but these are the big ones. 

 

Monetary - Money - Cash - We all know this one. What do we have to write the check for? Pretty straight forward. Do we have the money available to spend?

 

Effort - No matter what you are doing, there is some personal effort, and effort of others that is going to have to take place. Evaluate what that is. Do you have the capability and expertise to do it? Does your staff? If you don't have energy to invest into your cost cutting measure, it could quite likely have a negative result. Sometimes a 'cost cutting' measure can actually be a burden if you don't have the capability, or sometimes desire, to do what it takes to make it successful. My accountant says I need to keep all of my receipts to be able to cut my taxes. I don't. I have decided that the potential break is less than the effort it would take to do it. 

 

Time - Somewhat  like effort, cutting costs involves time. Time to make the decision, implement the decision, hold others accountable to implement the decision. It will take time. Make sure that the cost isn't saving only money, but time also. I had a client that calculated it cost him $140 to generate a PO. In order to save money, he chose to keep po's open for a month in case they ordered from that vendor again. It then took about 3 times as long to close the month. His number of po's went down, his per po cost went up, his overall overhead increased....

 

Switching costs - these involve not only time and effort related to making changes, but all those other costs. consider them all. New training, new forms, additional space, cost to repurpose space, and any other cost associated with your cost cutting effort. 

 

So the short of it is not to get too wrapped up in the monetary part of the costs savings. It is important, and is definitely one of the considerations, but often the reduced effort and time afforded makes an increased monetary investment make sense. Sometimes the switching cost overrides all of those thing, or affirms them. Make sure you consider the big picture.

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