When cutting costs is counterproductive

At Stringer Mallard we can provide businesses in the Harrogate area with assistance and advice on a wide range of business issues. Here are some reasons why cutting costs is not always the best policy...

When business owners begin to think about developing profit improvement strategies, we often find they are expecting to embark on what is principally a cost saving exercise.

But there is a lot more to profit improvement than simply cutting costs. Indeed, there is a danger of cost cutting strategies becoming counterproductive if too much reliance is placed on them.

Diminishing returns

In our experience, once businesses have identified and realised major cost savings, the law of diminishing returns dictates that any further attempts to make savings will be less effective. If too much emphasis is placed on cost reduction there is a risk of cutting into productive capacity, and even inadvertently increasing costs.

Moreover, a sustained cost-cutting exercise can damage morale and create an atmosphere of pessimism. After all, you cannot grow by cutting back.

Tunnel vision

But perhaps the greatest danger of overemphasising cost cutting is developing tunnel vision and missing out on more creative, and often much more effective, strategies for improving profitability.

Profit improvement is a process that ranges across every aspect of your business. And often the most successful strategies develop from the most unlikely places. Profit improvement is as much, if not more, about increasing revenue, as it is about reducing costs.

Focus on profitability, not just cost

This is not to say that cost reduction has no part to play in profit improvement strategies. On the contrary, when included in a comprehensive and creative programme it can result in considerable improvements on the bottom line.

However, the key to successful profit improvement strategies is to ask not how much does a particular process cost, but how profitable is it?

If you are in the Harrogate area and would like professional assistance from experienced accountants and business advisers, contact Stringer Mallard.

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Stringer Mallard, Harrogate Accountants

We recognise that being in business, especially leading a business, can be an isolating experience. We are your business partner for all the decisions you have to make, genuinely assisting in bringing to life your goals and ambitions.