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Daily Leadership Thought #175 – You Can Cut Expenses Too Much

July 18, 2011

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If you cut expenses too much in the short term you may hinder long term survival.

A big concern I have for businesses as we continue our slow climb out of this recession is that we may have developed some bad habits such as getting too used to reducing critical expenses as a default reaction to economic challenges.  When you are in a survival mode, the goal is to just keep the doors open and resize your organization to match its current and forecasted volume.   We tend to get very conservative with volume forecasts because of the perceived minimal margin for error.  However, if you prune a tree too much it will die.  It also requires proper fertilization and conditions conducive to growth.  The same result(s) invariably happens to companies.

There is only so much extra work we can expect out of our top employees before they burn out.  Offering little or no benefits eases short term economic pressures; however, it also makes people feel vulnerable and worried about their long-term security.  Business development requires making investments and can’t be done on the cheap for too long without adversely affecting your sales pipeline and top line results.  Old equipment and other fixed assets can be maintained for a reasonable period, but ultimately the downtime and problems aren’t worth it.

The goal of any business owner should be to grow their top and bottom lines, increase operational effectiveness and efficiency, attract, and retain talented employees, create a positive work environment, and create high levels of customer satisfaction/service.  All these outcomes typically require making strategic investments in one form or another.  They start out as expenses.  Of course, we need to prioritize our investments, plan our efforts accordingly and not get too overly optimistic about the short-term potential; however negative momentum will always lead to further negative momentum unless something positive is done to change the situation.

There is a famous saying that people can be “penny-wise but pound foolish”.   Businesses can and often do make the same mistake.   Take stock of your current situation:

  • Where have you cut too much?
  • Where are you vulnerable from a capacity standpoint?
  • Are you doing everything possible to keep your customers satisfied?
  • Are you doing enough to generate sales?
  • Do your top employees work in an environment they feel is conducive to success?
  • What is the next big opportunity and how can you begin to seed your ability to take advantage of it?

It costs money to make money and you can’t expect to achieve business success while continuing to embrace a survivalist mentality!