Cutting costs is a regular part of business life. If you don’t trim the fat, you’ll be the one on the chopping block. So, how do you know where to cut and when? In this article, we’ll answer that question for you, as well as explore other options that you may not know about yet.

Can You Outgrow Your Costs?

One of the problems that business owners run into is that they think that they can outrun their costs by just growing to cover them. The problem with that is there are two types of costs. You have fixed costs that don’t change based on the level of work that you do, and there are variable costs that do change based on the level of work that you do. If your costs are largely fixed – and necessary (more on that later), then you can and should try to outgrow your costs because they won’t change. If the bulk of your costs are variable, then as you grow so will your costs. It doesn’t matter how hard you try, you will never outrun them. Even if we crunch the numbers again.

Where To Cut

So, if you can’t outgrow your costs, then what do you cut? Given enough warning, you won’t have to cut personnel. Instead, you can start with costs that won’t affect your ability to do business. If you are in an emergency, then you’ll have to make the deeper cuts.

Zombie Costs

My friend Bob Moesta from the ReWired Group coined the phrase “Zombie Revenue” to describe a client that you may have who is paying for your product or service but isn’t using it. “You’re one expired credit card away from losing that revenue!” But on the flip side, you may be experiencing Zombie Costs – stuff you’re paying for that you don’t use, is redundant, or unnecessary. If you are making regular, healthy cuts start here. They are easy and will have little to no impact on your business.

Waste

In Lean business methodology, there are 8 different types of waste. Think of waste as a hidden cost that you don’t know you have, but you’re paying for all the same. By eradicating These wastes are:

Transport – you are wasting time moving things farther than you have to,

Inventory – you have too much inventory and it’s costing you money; there is an increase in damaged or defective work,

Motion – you are wasting time moving more than you have to,

Waiting – you spend time waiting for people to give you more work, for meetings to start, etc.

Overproduction – you make too much stuff and waste space storing it

Over-processing – you do more work on a project or product than you need to

Defects – products or services that customers cannot purchase are wasted

Skills – human potential is wasted by not sharing creative and management tasks

Deep Cuts

If you’re in dire straights and you’ve already cut the zombie costs and reduced waste then you’re in a pickle. You’ve got to make the hard decisions about personnel to let go. This is where being a leader comes in. You have to think about the good of the company over the good of the individuals you may have to let go, and you might have to go without pay for a little while. It sucks, but that’s part of being a leader.

Conclusions

Healthy businesses regularly review and cut outdated or unnecessary costs to protect profits. A trick to cutting proactively is to look for the zombie costs for things that you don’t use anymore but continue to pay for. Look for various types of waste in your business to help cut hidden costs as well. If you find that your variable costs are high and you’ve already found and cut your zombie costs and reduced waste then you’ll have to step into your role as a leader and make the harder cut decisions – like personnel and personal income. But, again the key is to proactively manage costs before you get there.

Don’t give up the ship!