Transcript Strategies For Cutting Cost & Improving Profitability

Strategies For Cutting Cost & Improving
Profitability
Small Business & Entrepreneurship Council (SBEC) &
Grow Fast Grow Right Enterprises, LLC
Webcast: February 28, 2007
1:00 – 2:00 p.m.
Andrew J. Sherman
Co-Founder & Legal Educator
Grow Fast Grow Right
© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Managing Costs and Maximizing
Profitability
• Understanding Your Management Style
(The devil is in the details)
• Manage What You Measure
– Understanding Dashboards and Metrics
– Reading vs. Truly Understanding Reports vs. Taking
Corrective Action
• Getting the Right Advice
– Professional Advisors
– Board of Advisors
– Coaches and Mentors
– Outsourcing Services Providers
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Managing Costs and Maximizing
Profitability (Cont’d)
• Penny-wise vs. pound foolish
(Act with integrity and don’t be short-sighted or cut
corners … it will come back to haunt you)
• Communication is critical (most vendors, lenders, etc.
will work with you if you communicate early and often)
• Understanding your “pain points” and inefficiencies
• Company capitalization (debt-to-equity ratio and
borrowing costs)
• Conducting “want vs. need” analysis on your current
expenses
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Understanding Types of Costs
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Fixed vs. Variable Costs
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Debt-service costs
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Infrastructure and Systems Costs
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Human Capital Costs
– Salaries
– Benefits
– Healthcare costs
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Advertising and Promotional Costs
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Overhead and Administrative Costs
•
Research and Development Costs
*** The type of cost you are trying to manage will dictate the strategy
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Cost-Management Techniques
Types of Strategies
Relationship-Driven
Cost Management
Techniques
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Managing Vendor and
Customer Relationships
Outsourcing IT
applications (ex. Network
Alliance), benefits, sales
financial management,
etc.
Cooperatives for
purchasing, advertising,
etc. (including trade
associations)
Joint Ventures and
strategic alliances
Employee incentives and
rewards for cost-cutting
initiatives
© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Financial and Management-Driven
Cost Management
Techniques
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Bootstrapping
Cash flow management
Managing employee
retention and turnover
costs
Budgeting, planning,
forecasting
Estimates and price
quotes
Corporate restructuring,
recapitalization and
reorganization
Market-Driven
Cost Management
Techniques
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Competitive bidding and
RFP’s for vendor needs
Grassroots and guerilla
sales and marketing
techniques
PR vs. Advertising Costs
Customer referral,
retention and loyalty
systems (80/20 rule of
costs of getting new
customers)
Barter networks
Human Capital Costs
• Employees vs. Independent Contractors
(IRS 19 point control test)
• Hiring the right first time and rewarding loyalty
(significantly reduces turnover/replacement costs)
• Outsourcing payroll processing, benefits, taxes, etc. (ex. ADP)
• Free agent nation and part-time/special project/temporary workers
• Telecommuting and virtual offices
• Professional Employer Organizations (PEO’s) (ex. Administaff,
Oasis) can handle everything from payrolls to 401(K) account
administration to hiring and firing functions (PEO’s now oversee
over 2.5 million workers in the U.S.)
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Best Practices
• Walk the talk … if you are serious about controlling
costs, then demonstrate it with your actions and your
employees will do the same
• Build and embrace a dashboard and reporting system
which will help you monitor and measure key metrics
• Consider third-party cost management services who
work on a contingent basis (ex. PRS)
• Build an expense-control culture which recognizes and
rewards employees (and others) who figure out ways to
control costs and improve profitability
• Benchmarking is key … know the typical ratios within
your industry and manage accordingly
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Best Practices (Cont’d)
• Closely examine each category of your expenses and ask:
– Do we really need to incur this cost?
– Is there an alternative and more efficient source or solution available?
– How will a reduction in this particular category of cost (or change in our
approach) affect our other operations or successes to date?
• Understand the direct and indirect impact of your cost-cutting
strategies on your culture and the fabric and values of your
company – the key to this process is to cut fat without cutting into
muscle or bone
• Act with integrity and honesty …. Cost-cutting can be creative and
aggressive but do not sacrifice your values and key relationships
along the way … communication is critical
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810
Best Practices (Cont’d)
• “Lean and Mean” does not need to translate into a
compromise of your culture … rigor can be instilled
without rigor mortis … and discipline can be instilled
without fear
• Changing bad habits and empowering and rewarding the
right behaviors with a focus on profitability is the key –
there must be an educational component to the
implementation of the cost-management plan
• Profitability-improvement programs do not always need
to be focused on reducing costs … there should also be
an effort to develop higher-margin revenue streams
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© COPYRIGHT 2007. ANDREW J. SHERMAN. ALL RIGHTS RESERVED.
2216810