2 wrong ways and 1 right way to cut expenses
The company was bleeding cash.
And the to do list of changes was daunting.
- inventory buying was broken with slow moving inventory piling up and a PO decision process that was a mish mosh of unclear assumptions and gut feel
- marketing was lighting money on fire with high CAC’s and low ROAS
- and OpEx made no sense with far too much headcount and fixed costs that were out of whack for the scale of the business
The whole thing was sustained by the increasing use of short term debt in pursuit of another round or a strategic acquisition. We were going to have to tackle all three issues.
When it came to OpEx, the real savings would be from reducing headcount. But I knew from experience that firing people is easier for everyone involved if you also make the cuts to overhead and expenses.
The person being let go can see that the issue is real because you are making every effort, both big and small to cut expenses. The people remaining understand the seriousness of the situation - ‘If they are cutting that expense, then we really need to focus on profitability.’ And you as the person doing the firing feel better about it as you know you are trying everything you can.
Mistake #1
You can’t cut costs if the CEO isn’t willing.
The need to cut expenses in order to help the company generate more cash - something that seemed obvious to me - wasn’t shared by the CEO. The first attempt ended with the CEO annoyed about wasting their time looking at one hundred dollar expenses. Nothing was cut.
I don’t know the reasons for this particular CEO, but I suspect unwillingness to cut comes from the following:
- cutting expenses and people runs counter to the pitch they are making to investors e.g. ‘we are growing!’
- it runs counter to how they have managed the business to date e.g. ‘we are growing top line’ and they are uncomfortable or unexcited about changing mindsets to profit and cash
- no one likes admitting mistakes and inherent in cutting is that admission.
- and for some vanity metrics like size of team can matter.
Mistake #2
Employees won’t volunteer to cut expenses.
For the second attempt I pulled all the vendors from the past 9 months. Expenses were hidden everywhere and I had to look through Bill.com, 4 credit cards and the bank statements to find all the vendors. I dumped them in a spreadsheet with a column for Cut/Keep, Notes and likely owner/group and sent it out to team leaders. The results were underwhelming. Virtually nothing came back labeled Cut.
I think three things happened here:
- one issue was fear of admitting a mistake. No one wants to have asked for software XYZ but then have to admit they could actually do their job without it and certainly no one wants to take responsibility for wasting money. It takes a particularly strong culture of experimentation and trust to overcome this very natural human tendency.
- a second issue was convenience. Everyone feels overworked. So people are loathe to give up anything that makes their job a little easier or faster.
- inertia is powerful. We have always done this, why do we have to change now?
The Right Way
I love Ron’s fix expressed in this post:
Killing the credit cards (and other sources of automatic payments) is definitive. We are going to zero based budgeting. The vendors will howl for payment and then you force everyone to have a real conversation about how necessary this expense is. A hidden benefit of those conversations is you get to reassess if people should even be spending their time on these efforts. It forces the conversation of whether this entire effort that requires all this expense is even worth continuing. Is this really the best use of our time and money in our pursuit of profits and cash flow?
Summary
- Generating profits and cash is a mindset and culture. It has to start at the top.
- Not only do small improvements add up, they compound with time. That margin and FCF improvement generate more with each cycle.
- Doing the small things makes doing the big things easier.
Have questions or need help with cutting expenses and generating more cash? Let’s chat.