It’s much more fun to think about - and write about - your company’s hyper-growth than to figure out your strategy is for making it through a dry spell.
But dry spells happen. And when they do, cost control is everything.
There are only two types of costs: fixed costs and variable costs. Fixed costs, as their name implies, are the ones that don’t change with the amount of business your company is doing. You carry those costs in both boom and bust cycles. The most significant fixed costs tend to be rent, employee salaries, and sometimes product liability insurance. If you have a lab or manufacturing facility, you also have to pay for electricity, water, and maintenance of specialized equipment. If you can dial these down to fit the amount of business you’re doing, you can consider them variable costs.
When things get cut, variable costs are the first to go. It’s relatively easy to cut spending on office supplies, travel, and other discretionary categories. Employees who are paid hourly represent a variable cost, since you can ask them to work fewer hours if you have less work.
There are two keys to keeping expenses under control. One is obvious - spending carefully. The other is using new technologies like cloud computing to move some costs from the ‘fixed’ category to ‘variable.’ Here are some thought experiments to help you get there:
Staff. How key are your people? Does your business depend on the institutional knowledge of people with specialized skills or training? Did you invest in their training? For some highly technical businesses, some people are essential. But if you have employees that aren’t pulling their weight, a downturn in your business could represent a good time to let them go. A team that hunkers down together to get through tough times can build a special bond, but they can also resent anyone who isn’t carrying their fair share of the burden.
Technology. Can cloud-based software solutions reduce your need for expensive enterprise software packages, implementations and employees? You may be able to delay investing in your own servers and dedicated information technology employees by making use of cloud-based software for accounting, enterprise resource planning, program management and customer relationship management. Instead of purchasing an expensive software license for each package, you can spread out payments via a subscription model. This helps with cash flow!
Energy. Instill a conservation mindset. Does your company think consciously about conserving its resources? While visiting a number of companies in Japan recently, I was reminded of how wasteful we can be. In Japan, because of concerns about power shortages, lights are kept out in hallways, and the air conditioning is off in rooms that are not in use. The lights and air in our meeting rooms were turned on when our meetings began, and off as we exited. Everyone was diligent about energy use. It was instilled in the culture, and I’m sure the electricity bill reflected it. After returning home with my team, we naturally adopted a more mindful approach to our use of electricity in our own facility.
Rebounding. Don’t forget to think through the ramp-up process. It is important to plan ahead for the time when business picks up again, and to decide how you’ll know it’s time to step on the gas. If you track the right leading indicators on a dashboard, you will see signals. If you’ve managed to hang onto key people, it’ll be easier to resume your growth than if you need to train new ones. This is why some companies choose to slash salaries across the board to preserve a team through the rough times rather than let part of the team go.
The more expenses you're able to move to the 'variable,' from the 'fixed' category, the less likely it is that you'll have to make drastic cuts if things slow down. That makes things a whole lot easier when it's time to turn up the heat again.
Technology expert. Global entrepreneur. Mentor. LAURA SMOLIAR, with over 15 years professional experience and a Ph.D. in physical chemistry, specializes in the commercialization of technology. @@lsmoliar