If you’re thinking about shoveling tons of cash to fuel growth strategies this year you may want to read the following blog post:
Here is an example illustrating the power of a cost reduction strategy versus a growth strategy for a company with $10 million in annual sales.
A company with $10,000,000 in annual product or service sales will generally have a 5% pretax profit margin and the other 95% of costs are made up of production and sales.
A 10% reduction in costs would increase annual profits from $500,000 to $1,450,000.
That is a stunning 290% improvement.
However, in order to get the same 290% increase in pretax profit margin through increasing your company sales, you would have to increase sales from $10,000,000 to $29,000,000 in a single year.
That means you would have to essentially triple sales.
This task of essentially tripling annual sales is almost impossible to obtain even during the best economical conditions. Not only is it difficult to achieve doubling or tripling your sales, it’s costly too.
In order to double or triple sales, large amounts of additional resources are needed such as increased machinery and plant use, additional employees, materials, marketing, and other forms of resources. Not to mention the other expenses that eat away at profits.
Basically, growth is very expensive, time consuming, and requires working capital and other additional resources which eat into your profits.
However, cost reduction can be the fastest easiest way to double or triple your profits in a short amount of time and requires fewer resources. In fact, most cost reduction strategies have very little expense involved and the payback is instant in most cases.
Build profits the easy way this year through a cost reduction program while keeping sales steady. Remember that smart cost reduction is the best way to support new growth. Think about it.
