Cost Cutting vs Cost Efficiency
Your financial success as an entrepreneur hinges on four responsibilities:
1. Turning promises into sales.
2. Turning sales into profit.
3. Turning profit into free cash flow.
4. Turning free cash flow into wealth.
The second of these trips up a lot of business owners because growth introduces complexity, complexity amplifies inefficiency, and inefficiency cannibalises profitability. This is why many veteran owners reminisce about how they made more money with less stress when their business was smaller and simpler.
The knee-jerk response to eroding profits is to cut costs, but there's usually a fairly low ceiling on how much fat you can trim (unless you've been grossly negligent and allowed expenditure to spiral way out of control). Furthermore, the benefits are additive at best because savings are independent of each other.
More importantly, cost cutting doesn't solve the root problem: inefficiencies accumulate during growth when we do more of what we've always done instead of doing things better. As a result, cost cutting isn't scalable. It's a band aid that gets ripped off during your next growth surge.
The alternative is cost efficiency, which is uncomfortable because you have to dig into everything that makes your business tick, confront your blind spots, and abandon outdated norms. It's a lot less convenient than crossing out line items on your income statement, but the payoff is exponential.
For example, halving your advertising budget will save you some money, but it won't improve how you reach, nurture, convert and retain customers. However, by taking the time to re-think your entire growth strategy, you'll likely discover entire sequences of small improvements that compound rapidly.
Cost cutting has its place, but too often it's a lazy reaction that never deals with the real issues. Short term savings aren't a substitute for long term sustainability and scalability.