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© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Strategies For Cutting Cost & Improving Profitability Small Business & Entrepreneurship Council (SBEC) & Grow Fast Grow Right Enterprises, LLC Webcast: February 28, :00 – 2:00 p.m. Andrew J. Sherman Co-Founder & Legal Educator Grow Fast Grow Right
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Managing Costs and Maximizing Profitability Understanding Your Management Style (The devil is in the details) Manage What You Measure –Understanding Dashboards and Metrics –Reading vs. Truly Understanding Reports vs. Taking Corrective Action Getting the Right Advice –Professional Advisors –Board of Advisors –Coaches and Mentors –Outsourcing Services Providers
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Managing Costs and Maximizing Profitability (Cont’d) Penny-wise vs. pound foolish (Act with integrity and don’t be short-sighted or cut corners … it will come back to haunt you) Communication is critical (most vendors, lenders, etc. will work with you if you communicate early and often) Understanding your “pain points” and inefficiencies Company capitalization (debt-to-equity ratio and borrowing costs) Conducting “want vs. need” analysis on your current expenses
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Understanding Types of Costs Fixed vs. Variable Costs Debt-service costs Infrastructure and Systems Costs Human Capital Costs –Salaries –Benefits –Healthcare costs Advertising and Promotional Costs Overhead and Administrative Costs Research and Development Costs ***The type of cost you are trying to manage will dictate the strategy
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Cost-Management Techniques Managing Vendor and Customer Relationships Outsourcing IT applications (ex. Network Alliance), benefits, sales financial management, etc. Cooperatives for purchasing, advertising, etc. (including trade associations) Joint Ventures and strategic alliances Employee incentives and rewards for cost-cutting initiatives Bootstrapping Cash flow management Managing employee retention and turnover costs Budgeting, planning, forecasting Estimates and price quotes Corporate restructuring, recapitalization and reorganization Competitive bidding and RFP’s for vendor needs Grassroots and guerilla sales and marketing techniques PR vs. Advertising Costs Customer referral, retention and loyalty systems (80/20 rule of costs of getting new customers) Barter networks
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Human Capital Costs Employees vs. Independent Contractors (IRS 19 point control test) Hiring the right first time and rewarding loyalty (significantly reduces turnover/replacement costs) Outsourcing payroll processing, benefits, taxes, etc. (ex. ADP) Free agent nation and part-time/special project/temporary workers Telecommuting and virtual offices Professional Employer Organizations (PEO’s) (ex. Administaff, Oasis) can handle everything from payrolls to 401(K) account administration to hiring and firing functions (PEO’s now oversee over 2.5 million workers in the U.S.)
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Best Practices Walk the talk … if you are serious about controlling costs, then demonstrate it with your actions and your employees will do the same Build and embrace a dashboard and reporting system which will help you monitor and measure key metrics Consider third-party cost management services who work on a contingent basis (ex. PRS) Build an expense-control culture which recognizes and rewards employees (and others) who figure out ways to control costs and improve profitability Benchmarking is key … know the typical ratios within your industry and manage accordingly
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Best Practices (Cont’d) Closely examine each category of your expenses and ask: –Do we really need to incur this cost? –Is there an alternative and more efficient source or solution available? –How will a reduction in this particular category of cost (or change in our approach) affect our other operations or successes to date? Understand the direct and indirect impact of your cost-cutting strategies on your culture and the fabric and values of your company – the key to this process is to cut fat without cutting into muscle or bone Act with integrity and honesty …. Cost-cutting can be creative and aggressive but do not sacrifice your values and key relationships along the way … communication is critical
© COPYRIGHT ANDREW J. SHERMAN. ALL RIGHTS RESERVED Best Practices (Cont’d) “Lean and Mean” does not need to translate into a compromise of your culture … rigor can be instilled without rigor mortis … and discipline can be instilled without fear Changing bad habits and empowering and rewarding the right behaviors with a focus on profitability is the key – there must be an educational component to the implementation of the cost-management plan Profitability-improvement programs do not always need to be focused on reducing costs … there should also be an effort to develop higher-margin revenue streams
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