Seems like a lot of businesses, specifically in the South African market seem to be focusing on cutting costs instead of increasing their sales to increase their annual profits.
Now, are you really increasing your profits by cutting costs? Shouldn't you be focusing on increasing sales rather?
I have been obsessively observing how many companies have been run for the past couple of years. We have seen quite a lot of struggle financially, and the sad part is that the employees find themselves on the receiving end as they either do not get paid, are paid late or not at all, and ultimately lose their jobs.
These are just some of the issues which generally face small businesses. With this, I observed that a majority of businesses tend to focus their energy on cutting costs rather than focusing on doubling or tripling their sales.
Reducing costs is not a clear-cut simple strategy which seems like a lot of executives or entrepreneurs may think it is. Reducing costs may increase the company's profits in the micro, this year, and next year ... but in the macro, is it a sustainable strategy?
Not really.
Cost reduction strategies may increase your profits, and impress your partners or the board. But reducing those costs may not increase the company's net profit margins - Meaning that, in the macro (long-term), the business may suffer.
The only way that reducing costs may increase profits is if the sale price and the number of sales remain constant. For example, in the technological field that I have been observing, new technologies and systems keep on being upgraded and improved year in, and year out, and to stay on top of the game, you have to be on the move with the new technologies that are continually introduced in your industry.
So, reducing costs in this instance may mean that you do not purchase the new technologically developed systems to increase the quality of your business outputs.
Also, reducing costs may mean you refrain from getting experienced people on your team as they may "cost" you more.
If cost reduction results in the lowering of the company's product or service output, then the company may be forced to reduce its prices just to maintain the same number of sales. This can easily result in a loss of any potential customer gain, or lack of customer retention, and may ultimately result in the loss of net gain.
The more drastic negative effect this may have is the gradual loss in market share - as the reduction in quality will result in having difficulties in maintaining the sales figures you have been comfortable with, and once you fail to retain a customer, chances are very slim to get new ones.
I think a lot of entrepreneurs or executives primarily focus on having a higher percentage of profits than they did the year before so that their balance sheet looks good. However, if they maintain that by purely reducing costs instead of increasing sales, the business stands a huge chance of failing or having difficulties in competing in their market.
Granted - increasing profits is the bottom line of any business. But if you do so by focusing on reducing costs instead of doubling or tripling on sales - you may not be improving the business's net profit margin, which would eventually harm the overall business's value and market share.
With new businesses coming in every market, failing to focus your attention on increasing sales, will ultimately see you fail.
Once you take the route of reducing costs, and not increasing sales, you might be gaining profits for the now, but in the long run, that may have some not-so-positive financial effects.
"Sales is the heart and soul of any business."
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