Is reducing costs always the best policy?

Should reducing costs be a primary aim for a business.  I have just completed a business survey, where one of the statements was that one of the aims of the Chamber of Commerce was to “reduce business costs” and it got me thinking about was this something that businesses should be aiming for?

At first glance, the answer would be yes.  Reducing costs for the same sales would mean more profit.  Surely it’s a no-brainer.  But what if reducing costs, say by using cheaper materials affected the quality of your product or the perception of the service you are providing.  This could reduce your sales as well as your costs, leading to a reduction in your profits.

Alternatively, increasing the cost of your materials might result in a better product or improved perception and increase your sales, increasing profit accordingly!

So reducing costs for the sake of it, is not always the best or most desirable action a business can take.  What a business needs to do is ensure that all the costs it is incurring are the right costs for the benefit of the business.  Not too high and not too low but just right.  Don’t spend just because everyone else does, or cut it because it’s a big cost and it seems to be the easiest way to improve short term profits.  Analyse each and every cost in terms of what the business needs.  As situations will change this analysis needs to be done continually, what is right one minute may not always be right the next.

How you do that, is to measure the business results and take the appropriate action.  If you don’t know what to measure then you need to know or find someone else who does, but do it you must.  This perversely might increase your short term costs, but the aim is to increase your long term profitability and for significantly more than the increase in cost.

Increasing or reducing costs can both be the best action for a business, but only if they are the right costs, in the right circumstances, at the right time.

At Gain we specialise in analysing and measuring business performance to ensure they know which action to take.  If you would like to know more then please e-mail, ian@gainaccountancy.co.uk  or call 01872 560326 and we will be glad to explore the options with you.

GAIN – MEASURING WHAT MATTERS