Have you ever heard the saying, "it's not how much you make but how much you keep?" If you increase your sales by 50%, but lose as much as you make because of waste and inefficiency, what have you truly gained?

Everything that we do in an organization, including sales has a cost attached. No matter your business or industry, companies are always trying find new ways to increase sales, find new customers, or grow their memberships. The combination of increasing competition and savvy customers means that companies must do a better job controlling costs if they want to improve their margins. The goal is to implement cost cutting measures that support your overall strategic position, deliver consistent short term results; produce sustainable long term efficiencies, and improve customer satisfaction.

COST #1 - The Cost of Unclear or Misaligned Goals

If goals are not clear people, work hardest at what they know how to do, not at the right things to do. 75 minutes of time spent working on the wrong activities or time lost performing rework cost a 500 person organization $3.1 million dollars per year (2004 Gallup Poll).

COST #2 - The Cost of Poor Problem Solving

Deferring problems or passing problems down the line, rather than finding and fixing them, accounts for a large part of organizational costs. Early problem recognition allows for the identification of more low cost options and allows the time needed to resolve them. The longer a problem is ignored the more people are affected and the higher the costs rise.

COST #3 - The Cost of Poor Decision Making

Poor decision making represents the highest cost to the organization. When a poor decision is made to chose a particular path or allocate resources in the wrong way, the costs include that allocation and the opportunity lost from not choosing a better alternative. Poor decision making has a ripple affect and unchecked affects more and more areas of the business. You get increasing cost along the way.

Costs, as a function of accounting represent the necessary expense of doing business. Whether it is labor, material, fixed, or variable, costs represent what is spent to keep the business running. Reducing costs has a direct impact on short term profit gains. The question is how do you make sure that you are getting the highest rate of return for dollars spent – how do you keep more of what you make?

    A 10% reduction in costs will deliver about 9% increase in pre-tax profits.

There are several things that you can do to begin to Reduce Costs:

   1. Set clear goals and communicate them often.
   2. Figure out where you’re a losing money, why you’re losing it, and stop it immediately.
   3. Improve the problem recognition, problem solving and decision making ability of every employee.
   4. Make decisions that are aligned with the overall goals and not by popular vote.
   5. Provide the best tools and resources that aid in job performance.
   6. Spend in ways that increase the value of the business, employees, and customers.
   7. Evaluate the trade-offs and look for the highest available return.
   8. Avoide unnecessary costs.

Cost Avoidance

Far better than cutting costs is the ability to avoid indiscriminate costs that come as a result of poor business practices. Opting for cheaper materials and inexpensive labor, or skipping process steps may, cut costs but they will not save you money. Cutting corners rather than planning reduction and saving strategies may help in the short run but the time, money, and effort spent on rework will send your cost through the roof. More proactive strategies for reducing costs include developing the strategic mindset of your employees and aligning the goals and priorities of everyone in the organization.

Remember that any attempts to cut costs must be in service of the customer and not at their expense. Reactionary cost cutting measures like massive layoff or drastic cuts in employee development; however do the opposite. Low quality products and services delivered by inexperienced, improperly trained employees will send customers running to the competition. The most appropriate way to reduce costs is to eliminate waste found in poor processes and ineffective job routines. Wasted materials, effort, and wasted time not only drive up the costs, but they also limit opportunities for growth.

Valarie is CEO of Think 6 Results -- a knowledge broker passionate about learning and improving performance in organizations. She’s a writer, presenter, and executive coach on a mission to get every employee and organization focused on and thinking about the SIX business driving goals that matter.

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