The Downside of Cost-Cutting


Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Friday, December 16, 2016

Being a CFO means putting your company in a good financial position. However, cutting costs isn't always the best way to do this.

Article 2 Minutes
The Downside of Cost-Cutting

The stereotype of a chief financial officer (CFO) as a grumpy bean counter, slashing costs across the business, is an out-of-date one. However, so many CFOs still adhere to the dogma of cost-cutting whenever possible, using it as a method to get the company making money.

The short-term vs. long-term benefits

While it's almost certainly going to be necessary at some point in your business' lifetime, this is not usually the best way to increase profits. Generally, investing in your company will pay off more in the long run, which is better than the short-term finance that cost-cutting provides.

One example is to look at the area of a business that is traditionally the first to get cut when times are hard: marketing. As Fora Financial recently pointed out, cutting marketing methods that are working well is a good way to also reduce your sales, which is the opposite of what you need when times are hard.

Of course, in order to know which marketing methods are providing you with sales, you need to be adept at tracking and analyzing data. If you are unable to find information that shows which marketing efforts are leading to sales success, it can be very difficult to know which methods are vital to your business. This can lead to useful efforts being cut.

What you should be doing instead

Instead, you should be looking at how to use your company's money more effectively. Often, changing what you spend on resources is much better in the long run than simply reducing the amount you spend. This allows you to plan for long-term growth rather than simply focusing on short-term savings.

Dr Paul Dorf, managing director of consulting firm Compensation Resources, told that instead of cost-cutting, CFOs should "Work with operations, sales and marketing, and human resources to identify their concerns and issues, and then assist them to find solutions that enhance the company's ability to get the job done".

Reducing quality

Another downside of cost-cutting is that it can lead to a reduction in the quality of a product or service, which again hurts your business in the long-term. Writing in Forbes, sales and business development author, strategic advisor and speaker Ian Altman recalled an example of this from his own life:

As he travels regularly, he has experience in different hotels. In one chain, he was greeted with excellent service. Talking to the concierge, she revealed that she got a bonus for each letter they receive from satisfied guests. In another hotel, the concierge got a similar bonus, but for cost-cutting. The service in this one was much less satisfactory.

The lesson here is that while cost-cutting definitely has its place, your business will be more successful in the long run if you can instead focus on investing in the future, providing your clients and customers with the best possible experience.

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