Business owners everywhere today are falling into the trap of expense-cutting. It’s what we’re supposed to do, right? Wrong! Let me explain.
Without a doubt, the ongoing Covid-19 crisis decimated most businesses’ ability to generate revenues. It seems like the only thing we can control are expenses and so it’s only natural that we start cutting them.
Here’s the thing… In business (and maybe even in personal) life, it’s not about the expense, it’s about your return on the money spent.
Instead of cutting expenses, I am advising those business owners I work with to evaluate the ROI (Return On Investment) of every expense line item on their P&Ls based on what’s happening in their businesses today and what they anticipate in the future.
We all hear about companies laying off employees. They are not simply cutting expenses, they are signaling that they will not get a positive ROI on those paid labor hours today and in the future.
Some companies are furloughing employees (think Redfin, etc). Those companies are saying that today’s ROI is negative, however they anticipate that in the future it may become positive.
Same conversations are happening about office space. Most companies are not using it today. What happens post-Covid? Will people flock back to their offices or will they discover their ability to be productive remotely/virtually? This question should be on the minds of every business owner today and especially those who invested heavily into brick and mortar philosophy, e.g. real estate brokerages.
On the other hand, there may be “expenses” that may require an additional capital investment when one looks at it from an ROI standpoint vs simply expense-cutting prerogative. If your business has a customer acquisition system that has been giving you a 5 to 1 ROI, it may be a good idea to invest more into that system.
Once again, it’s not about cutting your expenses, it’s about the ROI you’re getting today and anticipate getting in the future. After all, if you’re in sales, your cell phone and internet bill just got an ROI boost, didn’t they?
P.S. There are three components of the I in ROI - money, time, and energy. Evaluate wisely.
P.P.S. - The practice above is a great strategy to implement regardless of the economic situation.