You already know success requires hard work. In fact, it is hard work on the right things. Based on what successful businesses have done, let me explain what these right things are.

In Part 1 I started with CASH.

Now I talk about KNOWING YOUR GOOD COSTS FROM YOUR BAD COSTS.

The recession has been gruelling for you and you tightened your belt so much you thought your business would stop breathing. Now you sense an upturn in the trading of your business. At last you can loosen that belt a little.

This is a temptation to RESIST............and GIVE IN TO!

How so?

Too many businesses either give in to the temptation in the wrong way or resist it in the wrong way. Instead of surfing a wave of recovery, they find themselves drowning in a sea of losses.

The knee-jerk reaction of too many businesses when trading gets easier is to pile on costs as hard-fought disciplines are suddenly relaxed. Is a new suite of office furniture really necessary? And does it have to be designer label? Why switch to first class travel when standard class gets you there just as quickly? Are you sure you need a PA or does not that outsourced service remain perfectly good? You get the idea.

Like flab, once such costs are piled on they will slow your business down and it is so hard to get rid of them.

Efficiency is as necessary to business success in good times as in bad.

But beware being too puritan in your attitude to costs, especially when business opportunities are beginning to present themselves more and more.

An across-the-board ‘No’ to taking on costs can be as dangerous as an equally indiscriminate across-the-board ‘Yes’.

Businesses that stop all forms of extra spending, find that they fail to attract the talent they need to make the most of the opportunities that come with an upturn and customers melt away to competitors. Or they under-invest in training or external advice and then do not have the skills and knowledge to grow the business and it stays recession-small. Or they fail to promote their business strongly enough through marketing and the supply of new customers dries up. Or investment is cancelled. Perhaps the purchase of a replacement van is put off, which simply swaps a large one-off expense for a steady stream of ever greater maintenance and fuel bills with the existing vehicle.

As in physiology, it is not just the weight of the human body that is important but the proportions between fat and muscle. Healthy weight gain is about being very active in the right ways so as to put on not fat, but muscle.

It is the same for a business. It is not just the totality of the cost base that is important but the proportions of ‘good costs’ and ‘bad costs’. ‘Good costs’ are those that will bring in greater savings elsewhere, or extra business – and so income, or are simply what it takes to have a seat at the table in the business’ chosen market (ie keeping what you’ve got and then growing).

‘Good costs’ are muscle. After all, if your costs were zero, what do you think your income would be? Yes, zero!

Building muscle – investing in the activities that will strengthen your business and capitalise on the opportunities of the upturn – is a temptation to give in to.

Bad costs are like fat. These are the inefficiencies in the business. Inefficiencies most notably accumulated during an upturn in trading conditions when it is so tempting to drive the business for indiscriminate growth. Resist this temptation and you will avoid building into your business the legacy customs, the tortuous processes, the re-work, the ex gratia payments to complaining customers.

There is another ‘bad cost’ that I shall talk about in the next article, in Part 3. This is the ‘bad cost’ which is a missed opportunity: the foregone revenue of under-pricing......

Meanwhile: KNOW YOUR GOOD COSTS FROM YOUR BAD COSTS!

Top Tips:

Know your costs: distinguish between ‘good costs’ and ‘bad costs’;

'Good costs’ are those which support the capabilities the business needs in order to achieve its strategic objectives;

There is no magic formula for finding or avoiding ‘bad costs’ – only detailed scrutiny:

What are top 5 most important processes in the business? How do they work? How can they be improved?

Which activities are duplicated?

What activities can I stop? (The ones that do not contribute towards the capabilities needed for the business to achieve its strategic goals);

What alternative providers are there? (eg Can travelling to meetings be replaced by free Skype calls and webcam?)

Are there non-core activities that could be outsourced more cheaply?

What is the justification for every item of spending in the budget?

Improve terms: if investment spending is justified (eg on new equipment or training etc), can improved terms be agreed? (eg discounts, deferred payments etc);

Remember: simplify, simplify, simplify!

Email John Kirwan at: john.kirwan@augmentor-uk.com
Tel. 07818 054645