In these volatile economic times and the era of the fickle customer, small-business owners usually can't afford to be the business equivalent of “overweight.” We should commit to being lean and mean. So what does “lean and mean” mean today?
It means lower overhead, more efficient management of inventory and distribution, lower research and development costs, quicker speeds to market for new products and services (e.g., is it “good enough” to test target customer reaction?), more strategic alliances and partnerships to drive resource sharing and anything else that will ensure that costs incurred have a faster path to profits earned. Be careful to trim fat, but don't cut into the muscle or the bone, which can dilute your effectiveness and core competencies.
Here are four tips to keep in mind when cutting costs:
1. Don't Lose Sight of the "80/20 Rule"
That is, 80 percent of your marketing efforts are often spent on the customers or clients yielding 20 percent of the annual revenues. Imagine what would happen if you did some “housecleaning” of the customers or clients that were taking up all your time and not producing results while at the same time refocusing your efforts on the more productive and less time-consuming clients and customers with long-term growth potential.
2. Try to Do More With Less
Often the most effective marketing strategy or campaign isn't necessarily the most expensive or the most complex. Emerging growth companies as well as industrial giants often get better results by focusing on simplification. How is it done? Consider paring down unnecessary product and service lines, outsourcing post-sale functions such as training and support, cutting back on trade promotions, easing up on coupons, trimming new product launches, spinning off marginal brands, and using old-fashioned face-to-face meetings for maintaining relationships with clients and customers.
Companies today seem to be sticking with the strategies and product lines that have worked over time and are learning not to fix what’s not broken (e.g., the launch of “New” Coke). Even the “big three” American auto manufacturers are reducing and streamlining the number of models offered and expanding brand awareness in the “old standbys” and relaunching old brands (instead of new ones).
3. Be a Bootstrapper
Bootstrapping is the art of learning to do more with less. In light of the tightness of the debt and equity capital markets, many small-business owners are finding that raising capital may be difficult, so bootstrapping can become a substitute for—or addition to—your capital-formation strategies. It’s not about writing 200-page business plans, power lunching with venture capitalists or triple-mortgaging your home to pay legal and accounting fees. An entrepreneur who operates from a mindset of bootstrap management understands that resources are scarce and cash should be cherished. “Cash is king” becomes the mantra.
Many smaller businesses have learned how to survive on a shoestring budget—by being creative and aggressive and by carefully monitoring their cash flow. Thousands of companies each year start with just hundreds of dollars and manage to survive. But many others may die because they try to grow too big too fast or, worse, successfully raise capital, and then squander it. Instead of focusing on how and where this money can be raised, the bootstrapper will ask, “What would we actually do with the money, and are there other ways to obtain these resources?”
4. Be Smart About Daily Money Decisions
Here are general best practices of small-business owners who are committed to wisely cutting costs:
- Learn to do more with less.
- Buy (or lease) only what you need today—delay it if you can.
- Find another way to get access to what you would otherwise buy or lease.
- Reduce your personal cost of living to take pressures off of salary and overhead costs (encourage other leaders in your company to the same).
- Understand the difference between wants and needs.
- Focus on income-producing or market-expanding expenditures.
- Remember that there is always a way to get it done; your resourcefulness, creativity and tenacity are your only limits.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
Andrew J. Sherman is a partner in the Washington, DC, office of Jones Day, an adjunct professor in the MBA program at the University of Maryland and Georgetown University, and the author of 26 books on the legal and strategic aspects of business growth and capital formation.
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