I get it small business owners, I really do. When things get lean, with not enough profit, it's often simple and easy to cut costs. Maybe you don't pay yourself. Maybe you skimp on raw materials to save a buck. Maybe you drop some ancillary services, such as outsourcing landscaping, janitorial services, etc.
Does any of this solve a profit problem long term? I argue no.
Please consider the following reasons why I believe cost cutting for profits-sake can be perilous:
Cost cutting should only be for efficiency sake. If something can be done with quality, using less resources, on a long term or permanent basis, then that's great. However, shouldn't your business already be at this point? If cost cutting is done solely to help grow profits, it's a slippery slope.
Let's say you slash your marketing budget. Your profit margin might rise, but eventually the lost levels of demand from vacated marketing will counterbalance the savings. I have seen this happen numerous times. Sales, advertising, and basic promotional budgets are often the first things stripped, and slowly but surely customers fade away.
To illustrate, I had a client once (a supplier of manufacturing packaging materials) who was convinced that the organization did not need brochures, flyers, or any printed informational materials, stating that the sales staff could personally communicate about their products when visiting with customers. Can you imagine the look on a buyer's face when the salesman went into their office and told them "we don't have any brochures?"
If you cut expenses and make extra work for yourself or one of your staff by adding to the workload previous jobs done by outsourcing or former staff, like janitorial, you are chipping away at the time and energy spent performing your original job, and now both jobs.
Efficiency and effectiveness suffers. Their may be a boost in the bottom line for a while, but eventually too many mistakes and corners being cut, take a toll.
Morale also suffers from cost cutting measures. Employees burdened with extra work, or less to work with after cost cutting, certainly suffer morale issues. Additionally, cost cutting can be seen as a negative endeavor, psychologically-- it can create massive pessimism or cynicism for everyone.
Creation of more revenues sets a more positive tone. I have three tips or tactics on how to create more revenue, specifically geared toward those of you in small businesses:
1. Modest increases in pricing are often a real solution.
It boggles me to think that we don't bat an eye when gas prices go up or the price of produce fluctuates by season; but as a business owner, increasing your prices seems like a desperation move. It's not-- if your efficient in operations and not realizing profit then the likely culprit is pricing.
It's okay to have incremental price increases over time-- it's expected by customers in a lot of industries. Additionally, have you meticulously priced out all your costs?
For example, shipping costs, delivery charges, and/or handling fees should be accounted for so that you are covering and profiting from your commerce. Remember, you are supposed to be profitable- make sure your costs and margins are accounted for.
2. Try some guerrilla marketing and/or some slight geographic expansion.
There are a ton resources and examples online on how these can create more sales, with minimal costs. For example, student coffee entrepreneurs who are part of our Ignition Program at Muskingum University have made good use of attending farmers markets around the area. This low cost tactic has increased the scope of awareness and customers for them and stimulated more revenues.
Here's a video on some small business guerrilla marketing ideas, but don't forget, there are a ton of more resources online.
3. Find opportunities for cooperative advertising and bundling of products with other organizations
To illustrate, find like-minded entrepreneurs at your local chamber of commerce and share expenses of advertising and promotion. You can even bundle products with another company, capitalizing on a strategic partnership that may expand the customer base for both of you.
Creating revenues is hard work, but I argue it's beneficial to long term profitability. Cost cutting can work, but as stated before, you should already be at your most efficient level of operations, so anything you cut could be very detrimental to your future.