Trimming The Fat

Intensive scrutiny of costs is essential if you run a grocery store or other business with very low margins. But liposuction-style cost-cutting can benefit almost any entrepreneur. "With every business I've been in, costs sprout and spread like weeds," says Olson, who started typesetting and reference publishing companies before beginning his business-book enterprise four years ago. "So every now and then, it's good to spray a little weed killer."

Before starting liposuction, however, you have to determine what to cut. One way is to use activity-based costing. This technique assigns costs to business activities, such as answering help-desk calls and stocking parts bins, and can help to identify which costs contribute and which can be trimmed.

With accurate cost information in hand, you can decide on an overall cost-cutting goal. One way is to compare your costs to competitors'. Annual Statement Studies, published by Robert Morris Associates of Philadelphia, lists actual costs and other financial info for more than 140,000 mostly small and midsized companies in 525 industries. By finding the category most closely approximating your company's size and industry and comparing your costs to those companies', you get an idea of whether you're high, low or just right, Olson says.

Once cost-cutting is underway, you can see how well you're doing by comparing your effectiveness against competitors in the real world. And even if you're winning your share of the market and earning profits, explains Uecker, your cost-cutting has to continue.

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