Know How

Cost cutting by Richard Lucas, part 2.


Processes and productivity

Develop a “process” approach to everything you do. In a start up you do everything for the first time once, but once you do anything more than once, or you can see that the thing you are doing is going to be repeated, you need to develop intelligent processes that can be modified and improved over time. The absolute fundamental is not to do things that don’t need to be done, and keep the question of “are we doing what we do in the best way possible with as little waste as possible”.

Notice that doing things the best way possible is not at all about doing things “cheaply”, but using people and things your product or service is made out of in the best way possible. Toyotas are not made out of cheap components but there is very little waste in their production process.

Cost cutting can mean spending less on existing processes through eliminating waste. If you are making your staff copy numbers from one excel form to another, automate it. If you don’t understand business process automation, google it. The two biggest savings most companies can make are by eliminating processes that don’t need to be done at all and automating the processes that can be.

How do you know if your processes are efficient? Develop a sense of benchmarking and what “good practice” is in your industry. It really doesn’t matter what you do, you should always take opportunities to ask your team, your competitors, suppliers and partners how they do things, with the goal of comparing what outcomes they achieve, how they measure them, how much they spend to achieve the outcomes they do. If you are spending more to achieve the same deliverables as your competitors, aim to understand the reasons.

I am leaving until last two obvious areas of cost cutting: people and vendors.

The biggest cost of all will probably be your team. You cannot afford to keep people who are not making an active contribution to the health of the company. If things are going well, and the company is prospering it is tempting not to address “tough” people issues. Imagine there is a crisis and you cannot afford to keep going with the current team. Who are the least necessary people. The decision becomes obvious. If you are ambitious and want to make your company internationally competitive then you have to be upgrading your team as a matter of policy.

If you believe you have a sustainable business in the long run, and you can survive and prosper with the right wage bill you need to act. You have to be able to pay your key people well, even while firing those who are not absolutely essential.

You may come across someone who is so valuable that you prefer them as a business partner rather than an employee. It is always worth considering. And remembering to give the shares for performance delivered not just promises of shares.

If you are after your early start up stage and it is obvious that the company has a future then you need to ensure that your managers come to you with requests for pay rises, you know how to respond. Increases in budget from managers are a completely normal request in every company. What large companies do and what start ups can learn from is to ask for the business case. For every extra zloty or euro of budget the question is what does the company get in return. Is it increases in productivity, sales or something else. The unit cost of whatever the department wanting extra money should go down not up with extra investment. If you always insist on unit costs going down in return for budget increases your business will never get fat and flabby.

If you have clients, you may be able to cut your costs by raising working capital. If you are able to bring your accounts receivables in quicker, and through better credit control, and extending payment terms to suppliers. I am not a fan delaying payments to suppliers as not everyone can do this, but if the goals is to cut costs, getting your money a week earlier makes a difference.

If you are boot strapping a start up and really are not yet at the stage where you can even consider investing to cut costs, you simply have to find a way to keep the people on board. Transparency, negotiation skills, results related bonuses, profit shares, everything is on the table and negotiable, but if you have no money ultimate you are not going to keep your team together. The underlying message of this article is building a healthy profitable business by controlling costs all the time, not just in a crisis. Always keep a tight grip and you will have money for the things that matter and the resources to survive a crisis.

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Richard Lucas – angel investor, entrepreneur. 6 companies, 400 employees, 20 years in Poland, Cambridge University, Economics, TEDxKrakow speaker, and supporter. Interested in getting involved in start-ups as coach, mentor, minority investor, in business projects that are: better, cheaper, faster and more fun that the existing way of doing things.