5 Ways To Control Costs

Driving the bottom line through profitable revenue growth likely is the objective of virtually every company.  This should be the number one focus, of course.  If you’re not growing, you’re dying.  But companies also need to focus on controlling costs.  Without constant vigilance, companies can find themselves in an uncompetitive situation with bloated overhead.  The episodic slashing and burning that then becomes necessary can significantly damage a company.  These efforts risk producing exceptions on the financial statements, drive “one-time” charges, and hurt company culture.  The better way to maintain the appropriate cost structure is to control them in a sustained fashion.  Here are 5 ways to control costs.
1)    Renegotiate all contracts annually.  For whatever reason, American businesses presume that multiple year contracts will result in lower costs.  Maybe sometimes, but not always.  A smart company policy is not to have the life of a contract exceed one year.  This forces annual bidding or at least renewal discussions with the current suppliers.  Almost always these discussions will result in lower cost of goods.  A multi-year contract will usually favor the vendor.  Of course this is a lot of work.  But it sure pays out.
2)    Ask your customers. Annual planning sessions with customers have many benefits.  Naturally these discussions primarily should focus on ways to grow the business.  But too often these discussions fail to address costs.  By discussing costs holistically up and down the combined supply chains, customers often can recommend ways to reduce costs.  For example, how to take wasted steps out of the process, or how to plan jointly to smooth production, or maybe even how to change the product mix to get rid of costly items and replace them with some that are more profitable.  Talking to the customer is never a bad thing.  But talking about how to jointly improve business deepens the relationship, shows them you care, and helps reduce costs for both parties.
3)    Match terms with turns. Each item in your inventory moves at a different rate.  And yet suppliers normally apply a one-size-fits-all approach to payment terms.  You can reduce your working capital to zero if payment terms were matched with the inventory turns of each item.  By negotiating this into your contracts it incents the suppliers only to sell the best moving items and to work with you to improve inventory productivity.  The results will free up cash that can be deployed elsewhere in the business and improve profits.
4)    Ask vendors to own “their” inventory. Better even than matching terms with turns is to have the vendors keep title to their inventory until sold.  Normally inventory acquired from a vendor is held in your warehouse for use in manufacturing conversion or resale to your customers.  But why think of it as your inventory?  It hasn’t been used yet so why isn’t it their inventory?  Best planning results in “just-in-time” delivery so there is no inventory.  But this isn’t always possible, for instance, in industries like retail where that inventory is necessary for your own customers.  But again, why are you paying them and then sitting on their inventory?  They need to own the inventory until time of sale.  This is commonly referred to as “scan based trading” or “just-in-time trading.”
5)    Hold headcount constant. For sure this is a blunt instrument and it won’t always work.  But….  A long time ago I worked with a founder of a
business we acquired.  I complained one day that the parking lot was too tight and we needed to expand.  He smiled and told me he knew exactly how many spots were in the lot and checked the number of cars regularly.  When parking became too tight he knew his headcount had become bloated and he needed to take action.  While this isn’t the best or even a practical way to track headcount for most businesses, the lesson still is poignant.  Efficiency is gained when revenue per employee grows.  Technology, lean techniques, process engineering, etc. all are tools to free up time so employees can become more productive and you don’t have to add new headcount to grow.  What if you could replace your lowest 10% of performers with new people that matched your top 10%?  This would result in a huge productivity boost at virtually no incremental cost.  There are a lot of techniques to improve productivity, but the point is that constantly growing headcount certainly will result in overhead growth but won’t necessarily result in profitable revenue growth.
A dollar gained in revenue is a very good thing assuming it leverages the current cost structure.  But remember, only a small portion reaches earnings.  A dollar saved from cost, however, goes directly to the bottom line.  So while focusing on the top-line, don’t forget to engage in a systematic approach to governing costs as a way to ensure long-term value creation.
– Steve Odland

6 Things We Can Learn From The Facebook Graffiti Artist

David Choe accepted Facebook stock instead of cash as payment for a freelance gig.

David Choe, 36, is an accomplished painter in Los Angeles who has exhibited his work in galleries and museums. But he achieved worldwide fame this week when tweeters and headline writers dubbed him “The Facebook graffiti artist.” The accompanying story was less about his success as an artist, than about his success as an investor.
As you may have already heard (if not, it’s reported here), in 2005 Sean Parker, then Facebook’s president, commissioned Choe to paint graphic sexual murals on the walls of Facebook’s first offices in Palo Alto, Calif. He had a choice of being paid thousands of dollars (we don’t know how many zeros were involved) or receiving shares of Facebook stock worth an equal amount. Choe opted for the stock. When Facebook goes public, that stock will be worth an estimated $200 million.

 

It’s a great anecdote that we can all enjoy vicariously. But Choe’s success is the stuff of dreams. Most of us can’t come close to replicating it, either as freelancers, employees or investors. Those who try could get badly burned in the process.
Instead of chasing the next hot stock, we should look at Choe’s story as a parable. Here are some lessons we can learn from it.
1. Most freelancers need cash, not stock. As I wrote in my post, “How To Make Money Without A Job,” setting a fair fee and paying your expenses while you wait for clients to cough up what they owe, are two huge challenges of being self-employed. Choe’s investment only paid off because he could afford to hold the stock while it appreciated in value. If he had needed money to pay his bills, he would have had to opt for cash instead.
2. Invest in what you know. When you accept stock (or stock options) as compensation, you are making an investment. And to paraphrase Warren Buffett, you shouldn’t buy stock in companies if you don’t understand their business or can’t influence their bottom line.
People lost sight of this fact in the late 1990s when stock-option fever hit. Pay packages for everyone from secretaries to high-level executives were heavily weighted with stock options. Many people got rich on these options, but when the market swooned many others were left holding options that were underwater.
Choe actually made a mistake here: Back in 2005, when he took on the project with Facebook, he reportedly said he thought the whole idea of the company was “ridiculous and pointless.” He invested against his better judgment. And he happened to get lucky.
3. Be prepared to lose your entire investment. Most start-up companies don’t go public. For every dot.com millionaire, there are many more casualties of enterprises that failed. They include former employees whose compensation consisted mostly of stock in companies that went bust; independent contractors like Choe; and venture capitalists.
The stock that Choe received in exchange for his services turned out to be worth a lot of money. But what if Facebook hadn’t succeeded? In that case, he would have essentially painted the murals for nothing, or practically nothing.
4. Don’t put all your eggs in one basket. Chances are, Facebook started out as a miniscule part of Choe’s investment portfolio. Once the company goes public, it will probably comprise most of his net worth. He should think about diversifying.

5. If it sounds too good to be true, it probably is. The Facebook story is making us collectively giddy and euphoric. That could lead us to be more susceptible than usual to scams and get-rich-quick plans. When considering new investments, don’t slack off on your due diligence.

6. Do what you love. When he took on the Facebook assignment, Choe probably wasn’t thinking about getting rich. He was doing work that he enjoyed, which is always a good policy. That career strategy might not make you a millionaire. But one way or another, you’ll be richer for it.