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Quick Budget Cuts

By Joan S. Adams <adams@pierian.net> +1-212-366-5380

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A cost reduction program is great, but takes time. Here are some things you can do right away.

Costs go up. It’s an immutable law of nature, a certainty like death and taxes and the house always wins. In finance, this theory is called the “value of money.”

Simply put, a dollar today is worth more than a dollar tomorrow. Translated into goods and services, this means something that costs you a dollar today will cost you something more than a dollar tomorrow. Except in rare times of deflation, the value of money theory is in action every day. When costs go up, they go up incrementally, little by little almost every day. There’s no fanfare, no announcements, and the daily increase is so small that we hardly notice. Yet, when all these increases are tallied at the end of the year, it’s a big number.

It’s not just the cost of your pipe, valves and fittings that is going up. It’s everything—utilities, insurance, maintenance, payroll, benefits, etc. And this relentless climb in costs is eating right into profits. Rising costs are picking your pocket every day.

The only way to keep that money from leaking out of your company is to actively do something about it. I have written about cost reduction programs in the past, and these focused initiatives are still a good idea, but can take time. Today, let’s look at quick hits—those costs you can cut right now without a lot of planning and study.

Cost Cutting Arithmetic

Companies tend to focus on sales and growing customers. And with good reason—without sales and customers, where would the business be? Increasing sales is always good; getting new customers is even better. But sometimes a little cost cutting can be the best way to get a quick positive cash hit.

Cost cutting doesn’t have the glamour of sales and marketing. It’s downright mundane, something akin to coupon clipping, but cutting costs can be very profitable, and these savings show up as profits very quickly. Not only do you start saving immediately, but you save that amount again next month and the month after that.

More Quick Hits

Let’s look at a supply house’s biggest fixed and variable costs to see where and how you can start cutting some costs.

Cutting costs is not the exciting part of business. It doesn’t get the competitive juices flowing like landing a big job does. But stopping rising costs from their inevitable trend upward will put money right back on your bottom line. You can do these quick hits without a lot of effort. You work hard for your money—it is time to start keeping more of it. <<

Sidebar: The Case Of Wonderful PVF Inc.

Wonderful PVF Co. is stagnating. Sales aren’t growing as fast as costs—management knows something has to change or they are going to be in big trouble real soon. Let’s compare two different possible approaches to increasing profits: cost cutting and increasing sales to see which one has the biggest impact on the bottom line.

The Cost Cutting Approach

In this case, the Wonderful PVF Co. looks at overtime as a place to cut some costs. Sure enough, when the CEO orders managers to cut overtime, they manage to cut OT by 10 hours per week. Let’s do the math.

The Increased Sales Approach

In this case, Wonderful PVF Co. decides that by increasing sales, they will be able to get a nice bump to their bottom line. The sales guys go out there and sell an additional $10,000/month of material. Let’s do the math.

Keep in mind there was an assumption made that Wonderful PVF made profit of 4% of sales. Take a look at what happens at another company—The Average PVF Co. They earn something like 2% of sales net profit. This translates into increasing sales almost a half a million dollars ($480,000) to match the dollars brought to the bottom line by cutting 10 hours of overtime.

Ask yourself: which do you think will be easier to do?

Eliminating 10 hours of overtime a week?

Or increasing sales by a quarter to a half million dollars every year?

Unless your staff is made of sales superstars, I suspect you, like most PVF distributors, would opt for the cost cutting strategy.