Trimming The Fat

Cutting Costs

Once your goals and monitoring mechanisms are in place, it's time to find and surgically remove the most wasteful activities and expenses. Olson likes to cite a maxim from business author Jim Schell: "Avoid waterfalls in the lobby." The idea is that you can safely eliminate any cost that adds little or nothing to the value of your service or product.

Employees are the first place to look. "Not only are you paying them salary and benefits," says Olson, "but you have to provide them with equipment, space and supervision in the form of managers." When you add all that up, a full-time employee may cost $100,000 a year. "Getting rid of 10 managerial or professional employees can save you a million dollars," Olson says.

One way to keep costs down is to make sure all your product lines are strong sellers. Not sure how to do that? We can help you evaluate whether you've got a loser in Better Off Dead.

But don't just start slashing workers. Instead, ask yourself and your managers whether you can justify the workers you have. Says Olson, "Everybody on the payroll must be doing something that must be done and that can't be done cheaper."

If you have a job that must be done but isn't being done as cheaply as possible, look first to outsourcing. Uecker, who handles executive MBA and executive nondegree programs at the Jones Graduate School, says the outsourcing of routine tasks, such as making copies or supplying the office coffee machine, frees up his staff for more important duties.

Even Musa, admittedly not an avid cost-cutter, says, "We sometimes use consultants instead of high-priced [employees] to do the same job." The difference in outsourced help, he says, is flexibility. "It's not a recurring cost. It's terminable."

Musa also exercises discretion in hiring outside experts. Attorneys and other expensive professionals shouldn't be overused, he says. "You can probably cross out one point on a contract and sign it without running it by legal again, although they want you to," he says.

Also, selling any idle equipment or outdated inventory on which you may be paying taxes and expending maintenance can generate cash while reducing outlays. "I'm constantly surprised at what companies keep on their books," says Olson, who recalls one company whose bankruptcy filing revealed it owned a condo in Hawaii for the convenience of vacationing executives.

Next stop: your products and services. Selling products that don't produce profits and services that don't entice customers can be hugely expensive. "In every company I've worked for, people tried to push products the market wasn't responding to," Olson says. "It means you're just spraying out costs."

Don't just focus on products and services, Uecker advises. Look also for customers who aren't carrying their weight. Small companies desperate to boost sales are especially vulnerable to taking on customers who promise large revenue boosts but who-for reasons like excessive service requirements, slow payments or demands for discounts-produce low profits or even losses, he says.

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This article was originally published in the March 2001 print edition of Entrepreneur with the headline: Trimming The Fat.

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