Should You Generate More Sales…or Cut Your Costs?

Which is the smartest thing to do: generate more sales, or reduce operating costs?

Actually, the ideal is to do both simultaneously. The only way to make profits is to increase sales and reduce expenses…at the same time.

Naturally, when it comes to “marketing,” most people immediately think of generating sales; and that’s good. However, there are other aspects to marketing that can often be managed easier, better and result in the same goal—profits. It depends on the circumstances: the average sale — or guest check — and the mathematics/economics of the situation.

When it comes to cost savings, there are many ways to cut costs: e.g. tracking basic commodities, purchasing, shipping, storage of dry, canned, refrigerated and frozen goods; reducing or eliminating certain media advertising charges, long distance/couriers, outsourcing, reduction in time spent on mundane activities; the list is endless. Let’s say you were able to reduce your operating costs by 10%. Additionally, let’s assume this amounted to $10,000. Where does this ten thousand go? It mostly flows straight to the bottom line: ‘net profits before tax’.

[You can even find ways to reduce your taxes!]

Now let’s take a look at the other side of the coin: generating more sales. For purposes of illustration, let's assume that your profit on each additional dollar of sale is also 10%. For every extra $100 thousand in sales (on the top line), you generate $10,000 on the bottom line. If your average sale is $25, how many extra units do you have to sell to earn the profit ($10,000) on that extra $100,000 in top line sales?

You have to sell 4,000 additional units, at $25 each, in order to yield the same profits you earn by reducing your existing costs by 10%. What if the incremental costs to achieve the $10 thousand in extra profits (through cost-savings) is $1,500? Would you spend an extra $1,500 to earn at least $10,000 in pure bottom-line profit?

‘Silly question.

How easy do you think it will be to increase sales? Generating those extra 4,000 sales units is not going to be a piece of cake.

Marketing, advertising, selling and servicing the customer can be expensive, time-consuming, difficult tasks. If they weren’t, we’d all be rich.

Going through your existing operating system and seeing where you can plug the holes, reduce the food and/or labor cost, trim the fat — or use new technology, for example — often takes less effort, time and related cost ($1,500 spent to yield $10,000 in extra profits) than trying to market to and service that extra deluge of customers; especially if customers are a lot harder to come by these days.

Take a sharp pencil to your operation and cost structure. Determine where you can make some money by not leaving so much of it on the table.

Often with a fresh, new set of eyes, or a different 'perspective', you will now 'see' things in your operation that were there all along. You just got into the habit of not really seeing them…we all do that.

There may be some hidden treasure here! If you're looking for treasure, start digging in your own back yard. Ideally if you can reduce your costs, while generating more top line volume, your bottom line will be a very happy camper…so will your accountant and banker.

What do you think? Give me your two cents' worth…submit a comment, just below…