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Tips, advice, and information for South African business owners

06 Feb

The Cost Cutting Trap

When times are tough, the first thing that most business owners do is start cutting costs. That may seem imminently sensible, but as a kneejerk reaction it is riddled with pitfalls.

For starters, vigilant cost management should be a daily priority, not an ad hoc response to a looming crisis. When someone tells me that they need to cut costs urgently, what they are really saying is that they were too lazy, distracted, or incompetent to look after their business properly in the first place.

Secondly, cost cutting is unlikely to free up much cash immediately. There may be a few quick wins and the long term accumulation of savings may turn out to be substantial, but the short term gains aren’t likely to be very significant (unless you’ve been really neglectful and allowed costs to spiral way out of control).

Cost cutting also rarely addresses the root problem. Few SMEs run out of cash due to excessive expenditure. Poor cost controls may contribute to their woes, but they are far more likely to suffer from a flawed business model, ineffective marketing, shortsighted pricing, or stagnant cash flow. Spending less money won’t solve those problems.

Finally, cost cutting perpetuates lazy, short-sighted, and reactive management. For many business owners it is both the first and last course of action because it doesn’t demand much time, effort, or skill. As a result, they overlook a vast array of additional tactics for freeing up more cash.

Don’t fall into the cost cutting trap. At best, it can buy you some time to implement a sustainable turnaround strategy, but too many business owners settle for superficial relief instead of dealing with the real issues.

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