Whether it is continuous improvement efforts or your business is struggling, it necessary to look for ways to improve business. Under each circumstance the focus and knee-jerk solution tends to be increased efficiency through cost cutting strategies. While cost cutting helps, it usually does not solve all problems for a business and eventually becomes more and more cost cutting activities. In such a case the cost cuts are only a quick-fix masking other issues found on the “other side” of the income statement.
Cost Cutting Can Be Just a Band-Aid to Bigger Problems
High costs can drown a business, we all know that but cost cutting is something businesses are usually always doing in order to be as efficient as possible. In times of struggle or even failure cutting costs buy time but usually do not solve deeper issues.
By only cutting costs the focus is exclusively placed on expenses while revenue is forgotten completely. It takes both to lead a profitable business. The knee-jerk reaction to look at costs may prove to be a Band-Aid to larger issues related to customer retention and acquisition. Such a cover-up blinds us from these other sources of inefficiencies found on the revenue side of the income statement.
Only cutting costs may also make a current problem even worse. By cutting costs, business functions have to be removed which leads to a lower quality product or service that may end in lost customers on the fringe of your customer base.
Analyze Cost and Revenue Drivers
A proper analysis to improving business must include both your expenses and your revenue. Looking at both cost drivers and revenue drivers you will identify any possible cause of inefficiency in your business model. Quick fixes of cutting costs will help but only delay greater issues down the road when customer base disappears due to outdated products, poor pricing strategies, lack of customer incentives, and low customer acquisition rates.
Issues are too often much greater than simply one side of the income statement. As business leaders we must avoid the knee-jerk reaction to only analyze a single side, which usually is cost. Analyzing both will create not just solutions to current problems, but will provide sustainable growth into the future.