Everybody looks after the bottom line. After all, it’s one of the best indicators to describe the status of an enterprise. If you’re a business owner, you may have devised ways to improve your bottom line and it typically falls into two approaches:
- Increasing revenue
- Cutting costs
It’s always a good idea to improve your revenue and efficiency, but if it can’t be helped, prioritize increasing your sales if you can spare cutting costs. In the words of acclaimed accountant, Adrian Van Zelfden, “You cannot shrink your way to profit.”While cost-cutting is a popular business strategy, it's not without its risks. When done correctly, being cost-effective may improve a company’s bottom line by becoming more efficient. However, cost reduction can also lead to problems that can affect a brand’s customer base and jeopardize the future of a company. In this article, we’ll take a deep dive into what cost-cutting is, why it’s a counterproductive strategy if you want to build your business, and what are its risks for residential home service businesses.
“You Don’t Understand Business”
The cost-cutting process is used by companies to reduce their expenses and increase their profitability. The most common time for a company to implement cost-cutting measures is when it is undergoing financial stress or experiencing an economic downturn. In some cases, if a company's management anticipates profitability issues in the future, then cost-cutting can become part of the business strategy. While there are a number of reasons why businesses may choose to cut costs, it’s not an ideal practice to sustain a company’s longevity as I’ll explain later. In Roy H. Williams’ recent exposition on cost-cutting, he explained briefly explained the dangers of cutting costs as he revisited the rise and fall of the once-pinnacle of American automobiles, General Motors. For context:General Motors was formerly described as the world's richest and most powerful automaker. The year 1981 marked GM’s slow and painful death with the installment of Roger Smith as the company’s CEO. Although Wall Street saw him as a brilliant businessman who maximized profits through his cost-cutting strategy, anyone who was passionate about cars saw that he was destroying the American icon from the inside out. The fruits of Rogers’ approach failed as GM’s one-of-a-kind identity slowly fell into the Sea of Sameness along with other car manufacturers. The 46% market share that GM held prior to Roger’s arrival dropped to 35.4% after 9 years. Finally, GM ended its downhill reign in 2009 with a net asset of -$91 billion. Whenever Roy voiced his complaint regarding GM’s market performance, his brother-in-law would retort, “You don’t understand business.” The same 4 cold-hearted and demeaning words every single time. The thing is, it’s easy to understand. You cost-cut your way through business, always looking for ways to save a few bucks. And it worked. By reducing expenses, your business increased its profits, boosted the bottom line, and remained competitive in a tough market for a while. Eventually, your cost-cutting caught up with you. Your residential home service business went bankrupt. You're left scrambling to find a new job. If you're thinking about cost-cutting as a way to build your business, think again. It's a surefire way to ruin your business and end up jobless. Learn from GM’s cautionary tale and avoid making the same mistakes. Cost-cutting may seem like a good idea in the short term, but it's not a sustainable way to run a business. Do you know what’s sustainable? Increasing your sales. Wizard of Ads™ will help improve skyrocket your revenue and improve your bottom line without the detrimental repercussions of cost-cutting. Book a call.
Depriving a Brand of the Oxygen of Creativity and Innovation
If you take a closer look at Wall Street bigshots and private equity firms, they’re typically always all-praise for cost-cutting CEOs. They hail them as heroes thanks to the short-term gains contributed by cutting costs. These people focus on the outward financial stature, but not the internal and revenue impacts of cost-cutting. The most common cost-cutting measures done by companies are the following:
- Laying off employees
- Decreasing employee salary
- Closing down certain business facilities or branches
- Streamlining the supply chain
- Downsizing offices
- Relocating to less expensive buildings or regions
- Limiting outsources services
The problem is that cutting costs limits a business and its constituents the room they need to grow. In a fast-paced, highly evolving, and viciously competitive market, like the residential home service industry, cutting costs may spell doom for an enterprise. Take an HVAC company, for example. A steady pool of readily available technicians provides the company a headroom to deploy people in multiple projects. A fleet may focus on installing ductwork for a large building, while another group is sent to a household for diagnostic and repair. Cost-cutting through employee terminations will hurt the business, especially during peak season. In the age of the internet, customers value speedy response times above all else. According to HubSpot Research, 90% of customers say that ‘immediate response’ to customer service questions is essential (60% agree that ‘immediate’ means 10 minutes or less). Moreover, McKinsey & Company says that 70% of customers’ buying decisions are based on how they feel companies treat them. With these data in mind, reconsidering cost-cutting should always be high up your priority list. Otherwise, you will likely lose your clients to your competitors. A focus on customers should always be maintained before, during, and after cost-cutting and the process shouldn’t be seen as a mere revenue-enhancing ploy. Residential home service businesses that ignore what customers value are at risk of wasting valuable revenue. Based on MIT Sloan’s assessment, cost-cutting companies that overlook customer value exhibited the worst gross margins. Conversely, companies with high levels of cost-cutting while retaining high levels of customer value displayed the highest margins. This is known as Operational Excellence. In other words, cutting costs and upholding customer value are two peas in a pod. With that in mind, before embarking on a cost-cutting strategy, it’s necessary to set up a strategy that will cater to the cutback procedure. There are some non-negotiable costs to keep the biz in operation, so it’s a good idea to segregate each before you arbitrarily and haphazardly cut costs. Cutting costs isn’t a sustainable bottom-line-boosting measure. However, if it can’t be helped, focusing on customers is the key to a more effective cost-cutting strategy.
Risks of Too Much Cost Cutting in Home Services Businesses
As the United States is slowly reeling into recession, Residential Home Service Businesses may find it more difficult to generate the usual number of sales. This may even force some companies with tight cash runways to cut costs in order to keep the business running. These are dire situations and often, they also demand extreme measures. Cost-cutting is an effective band-aid solution to the problem, but it doesn’t come without possible backlashes. Below, we outlined some of the risks associated with too much cost-cutting among home service businesses.
1. Severance Pay
Laying people off is one of the hardest cost reduction approaches you must do as an owner because it means having to cut jobs. Severance pays are compensatory benefits that employers extend to employees when the employment comes to an end. Some contracts require employers to issue severance pay, while others include severance packages that include benefits and health insurance. Employers are required to provide severance If a clause of a residential home service technician’s contract indicates it. There are severance packages that also cover employees who resign or are fired. Factors such as length of employment and cost-cutting measures can influence how much the employee receives. These costs add an additional burden on behalf of the company, especially if they’re going through economic distress. Unless otherwise stated in the contract, an employer may decide whether or not to offer severance pay. In some cases, it could be a gesture of goodwill to help employees have a buffer until they secure a new position.
2. Unemployment Benefits
If residential home service businesses do not indicate a severance pay clause for employee downsizing, they may still suffer financial losses from unemployment benefits. Unemployment benefits, more commonly known as unemployment insurance(UI), are state-imposed insurance for eligible individuals who lost their jobs. That includes those people who were downsized. Commonly, people who qualify are those who were separated from their work due to cost-cutting. On the other hand, those who resigned or were fired with just cause don’t qualify for UI. Although unemployment insurance is a federal law, each state is responsible for administering it. Workers who aspire to join must meet the State’s required work and wage, including the time rendered. The UI program is funded through taxes on employers. This includes the state tax and Federal Unemployment Tax Act. In other words, it remains a part of a residential home service business owner’s obligation to support downsized employees.
3. Rehiring Costs
One reason why many companies are reluctant to downsize is that cutting costs can backfire on the business and hurt their economics further. If economic downturns and the threat of failing businesses happen to be short-lived, another heavy toll on the finances is rehiring costs. On-boarding new employees is daunting, especially in industries like residential home services where technical training is required. The actual cost of hiring employees means more than just their salaries. If you factor in the cost of recruiting, training, and the 5 to 8-month period before newly hires reach full productivity, business owners will feel the cost surge. For this reason, it’s best to give it some time and thought before home service businesses engage in cost-cutting. Expertise takes time to teach and acquire. In extreme cases, choosing other cost-cutting measures like relocating or decreasing office hours is better.
4. Lowers Morale of Retained Employees
Downsizing can have a significant effect on employee morale. When cost-cutting measures result in layoffs, employees who remain with the company may feel insecure about their own jobs and worried about the future of the company. This can lead to decreased productivity and engagement, as well as increased absenteeism and turnover. Employees who are affected directly by downsizing can also experience a range of emotions, including sadness and betrayal. These feelings can be exacerbated if they are laid off without warning or given insufficient severance pay. Residential home service companies should communicate openly and honestly with employees about the reasons for cost-cutting measures such as downsizing. By being transparent, companies can help to build trust and maintain employee morale during difficult times. While downsizing can have negative consequences for employees, there are steps that companies can take to mitigate these effects. For example, offering outplacement services and providing counseling can help employees deal with the psychological impacts of downsizing.
5. Overworking the Remaining Employees
When cost-cutting or downsizing measures are implemented in a company, the remaining employees often have to pick up the slack. This can lead to overwork and burnout among these employees. In the residential home service industry, this is often seen when housekeeping or maintenance staff are cut. The remaining employees have to work harder to keep up with the demand, leading to longer hours and less time for breaks. This results in lower quality of work and disgruntled employees. While cost-cutting measures may seem like a good way to save money in the short term, they can actually lead to higher costs down the road in the form of employee turnover and lower productivity. When employees are overworked, they are more likely to make mistakes, miss deadlines, and have accidents. This can cost the company money in terms of lost productivity, legal fees, and insurance claims. It is important for companies to find a balance between cutting costs and maintaining a happy and healthy workforce. downsizing should only be done as a last resort, and even then, care should be taken to ensure that the remaining employees are not overburdened. Otherwise, the company may end up spending more in the long run.
Is There Such Thing as “Good” Cost Cutting?
Asking if there’s a “good” form of cost-cutting is a double-edged sword. The very reason for cutting costs is anchored more often in an unfavorable situation that coerces management to adopt cost-reduction strategies. Moreover, companies are often accused of cost-cutting at the expense of quality, customer service, and employee morale. Alternatively, sometimes new technologies or economies of scale allow for cost savings that aren’t detrimental to the employee or buyer’s experience. For example, if you have optimized your radio buy for frequency and reach, there is no need to spend more budget if the job is being done. There's no denying that cost-cutting is detrimental if done for the wrong reasons. Cutting costs to improve the bottom line is usually not a good idea. This can lead to corners being cut and quality plus customer service suffers in the exchange, which ultimately does more harm than good. In reality, there are some ways cost-cutting can be beneficial, especially when they’re done for the right motives. To understand the concept of good cost-cutting, it’s important to first know what good, bad, and best costs are:
- Good costs
Good costs are the expenses dedicated to the growth of a company. They are aligned with the company’s customer values and are either used to meet your customer needs or product/service needs. Good costs help your business achieve its goals by providing room to train employees, support their growth, or allow your company as a whole to innovate. An example of this cost would be resources used for advertising and marketing.
- Bad costs
Bad costs, on the other hand, are expenses that don’t reflect the company’s growth strategy. They are often overlooked and waste valuable company funds. Some bad costs may be necessary but are not significant in improving your business or reaching your goals.
- Best costs
Your company’s best costs are the expenses associated with the elements making your company unique. They tie in closely to your unique sales proposition. For example, a residential home service business may waive diagnostic fees if customers decide to commit to a full repair or installation. These costs fall into your best cost because it makes your company what it is. Your company is on the right track, a.k.a. Implementing a good cost-cutting strategy when you minimize bad costs. This way, your company can free up resources that you can use for more productive endeavors. Like improving the efficiency or streamlining operations that save more money in the long run. Do note that not all cost-cutting measures mean cutting a cost. For example, using applications that allow companies to monitor employee productivity and time spent on projects or tasks is an example of optimization and efficiency. The management can introduce time-saving ways to make task accomplishment more efficient.
You Cannot Shrink Your Way To Profit
“It is easier to increase sales than it is to cut expenses.” - Roy H. Williams
If you had to choose between maximizing revenue streams and cutting costs, choose the former. You may suffer irreparable consequences in extreme cases. Cost-cutting measures should always be approached with caution. They should only be enforced if there's a clear benefit to the company, and they should never come at the expense of your product’s or service’s quality. When done correctly, cost-cutting can be a good thing for your residential home service business. It can improve efficiency, save money, and help simplify operations. Just be sure to approach it carefully and always keep the best interests of your company in mind. Don’t wait until you have no other choice but to cut costs. With the help of Wizard of Ads™, you can increase your revenue and propel your bottom line without cost-cutting measures. Book a call.