CFOs & CEOs: There Is An Alternative to Cost Cutting.

July 23, 2022 Peter Strohkorb

Steve Jobs on Cutting Costs

This article is for CEOs, CFOs and Business Owners who are looking to respond to the global economic downturn. It will inform you on your choices and options, some of which may be counter-intuitive.

There can be no doubt: Right now, we are in the middle of a global health crisis that is resulting in a severe global financial downturn.

Many CEOs, CFOs and Business Owners are responding by trying to take cost out of their operations, laying off staff, battening down the hatches and some just hoping to hibernate their way out of the crisis.

But there is another way.

Below, I will show you three different scenarios to illustrate what happens when you pull teh levers that are available to you by the same amount, namely just by 5% each.

Here we go.

This first image below illustrates our base case in this scenario. I have purposely kept the numbers simple to make it easy to get the point.

In this base case scenario, we assume that you sell a product or service for $100, while it costs you $60 to produce.

Your gross profit is therefore this: $100 minus $60 equals $40.

Then we subtract your fixed costs, admin and direct selling expenses, and end up with your base case profit before tax (PBT) of $10.

So, in this base case scenario, on sales revenue of $100 you make $10 profit before tax.

So far, so good.

Now, we will make an adjustments by just 5% to our base case in order to illustrate how you can achieve a dramatically difference financial outcome.

1. Reduce Your Direct Selling Expenses By 5%.

Based on the base case scenario above, the table below shows the impact on your bottom line if you reduce direct selling expenses by 5%.

As you can see, reducing direct selling expenses by 5% improves profitability by only 3%.

The improvement to your bottom line is only minimal. In fact, to me, this does not seem a hugely effective way to improve bottom line results.

2. Increasing Your Sales Revenue By Just 5%

In this scenario, I make a different adjustment, also by just 5%, but in the other direction.

Here, I will illustrate what happens when you increases your sales revenue by just 5%.

In other words, what happens to your bottom line when you sell 5% more?

In other words, what happens to your bottom line when you sell 5% more?

Here it is:

In this scenario the business is now selling $105, i.e. $5 more than in our base case scenario.

Leaving all other expenses the same as in our base case and just increasing your sales revenue by 5% makes a huge difference to your bottom line. It improves by a massive 20%.

Just increasing your sales revenue by 5% makes a huge difference to your bottom line. It improves by a massive 20%.

That's a four-times profit multiplier!

That's a four-times profit multiplier!

A word of caution though: The same dramatic effect that I demonstrated above works also in reverse!

You see, discounting price by 5%, results in a bottom line profit result of just $5, which is a 50% DECREASE to your bottom line!

Discounting price by 5% decreases your bottom line profit by 50%.

Discounting is huge profit killer!

So, think twice about cutting costs when you can lift sales and grow the business instead.

Now, HOW do you increase sales revenue in a downturn? You review and adjust your sales fundamentals, maybe even pivot your business to drive new growth.