The purpose of every business is to make money, which benefits the shareholders, the staff and the customer without whom there is no revenue to produce profit. When profits are down and costs increased, there will be a demand to cut costs. But the first action should to identify and understand why profits are down. Profits are derived from profitable income, but organization and associated management costs can produce an overall loss from a profitable income base.
If reduced income is causing cash flow problems, then cutting expenditure in the short term may be necessary. However, being selective about what to cut and by how much will be essential for the long term future of the business. If arbitrary and damaging cuts are to be avoided the commercial manager must demonstrably justify the level of expenditure in producing necessary income. Commercial managers are responsible for getting and retaining business, to produce profitable revenue. Getting and retaining business costs money, but when profits are squeezed, there is always a pressure to cut costs, and the marketing budget is an easy target.
Income generation through customer satisfaction is the primary objective of every business. To that end any business activity that does not actively contribute to income generation should always be reduced to the demonstrable minimum necessary to support the business operation. The commercial manager always needs to know how much it actually costs to get and retain business, and how the various investments and costs contribute to the production of profitable revenue. Before making any cuts, it is important to analyse every section of the business in terms of its costs and contribution to income and profit.
As company workforces increase, so there is a tendency towards a bureaucracy of little empires, with all that that entails. But bureaucracies create inefficiencies, increase cost, reduce profits, and cause employees to lose sight of the purpose of the business which is to produce money. This in turn leads to the workforce becoming more remote from the customer who provides the money on which the organization survives.
It is important not to cut everything proportionately across the business, as this tends to magnify hidden weaknesses while diminishing strengths. In every business there are elements that contribute to income and those that only contribute to cost. Administration is essential for the management and organisation of every business, but administrative organisations tend to grow becoming more costly, inefficient and unnecessary. Unless controlled, as organisations grow, administration tend to grow faster increasing costs and reducing profit. Can the size and cost of the finance department be justified, or especially that of HR, which was often smaller and more efficient when known as Personnel. What do diversity managers or compliance contribute to income generation and how much do they cost? Are they really necessary or just pandering to corporate virtue signalling? Areas that do not demonstrably and directly support customer income generation should be seriously reduced or if necessary out sourced altogether.
The process of producing income should be central to every business organization, but many give the impression of being organized as a series of largely unrelated activities with the purpose of producing a product and retaining a structure, rather than producing profitable income efficiently for the long term future of the company. In nearly every business organization, the management structure illustrates what they do, but not what they contribute. Thus businesses have separate departments of production, finance, purchasing, personnel and sales. Each department tends to develop a silo mentality where it relates to its own limited objectives. Production seeks to maximize production, sales seek to maximize the volume sold, and finance seeks to balance the books.
All business departments should be examined along the following lines:
What does the department do?
How is it necessary?
How do its activities relate to customer satisfaction and income production?
To whom does it report?
What are its responsibilities?
What does it contribute?
What is its output?
How is it organised?
Can it be simplified?
If maximizing profitable income is the primary purpose of every business, then businesses ought to be organised, structured and managed, accordingly with income generation through customer satisfaction the primary objective. To that end any business activity that does not actively contribute to income generation should always be reduced to the demonstrable minimum necessary to support the business operation, keeping costs to the minimum necessary.
© N.C.Watkis, Contract Marketing Service 19 May 22
