Simpler Business Institute

Newsletter # 4 - Marketing vs Cost removal in a downturn?

This newsletter reminds us of one of the simple truths about sales and costs.

In the table below, I have prepared an example of a basic Profit & Loss statement for a business for a particular period. Depending on the size of your business, you might look at these sales and costs as representing a typical day, or week, or month.

Let's assume that we've been working on preparing ourselves for the recession. Our sales have dropped to $110,000 but we have been able to reduce our costs to say $100,000 so our profit is $10,000.

We now have a choice of strategy - improve our marketing and grow our sales against the general trend and/or find further cost reductions to increase our profits as a precaution against a further downturn in sales demand.

What would you do in your business in the current economic situation?

Moving down the table, to increase our profits by $5,000, we need either to

• Increase our sales by approximately 30%, or
• Decrease our costs by a further 5%.

30% is a lot of extra sales to make the profit, compared to achieving the same via a further 5% decrease in costs. Psychologically, it's probably going to be simpler to find opportunities to remove the costs.

My reason for giving this story is that I regularly see owners and managers relying on their marketing to generate increased sales as the key strategy in a downturn, whereas it is generally more effective to remove costs. For example, not supplying some of your high-cost customers will save you money. Give them to your competitors to handle in the difficult times - you can get them back on your terms later on, if you really want them.

Unfortunately, many owners and managers can't bear the thought of having to give away any customers, even though they are costing the business more money than they generate.

The impact of sales growth vs cost reduction is something we all need to be reminded of from time to time, but especially when times are challenging.

If you have any business friends or colleagues whom you think will get value from the message in this or previous newsletters, please forward it to them and suggest they sign up for the newsletter on the Simpler Business Institute website.

For more tools proven to help you make better business decisions, visit www.simplerbusiness.com and purchase the downloadable e-book on simpler business strategies and operations.

For now, simply does it!

Ian Dover