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Business cost reduction: A force multiplier
In military language, a force multiplier is the term used when a factor enables a force to work more effectively and more efficiently. We want you to think about how this concept applies to business management while you look at the following questions. Although they vary in content, essentially they’re all asking the same question:
“One dollar saved is worth how many in sales?”
“One dollar in cost savings translates to how many in sales?”
“How many dollars in sales are equivalent to one dollar in reduced expenses?”
Without further ado, here’s the answer:
The impact of cost reduction is rapid and significant. But why?
The answer is simple: cost savings fall directly to the bottom line of your business. When a dollar comes into your cash register, a portion of that dollar pays for the Cost of Goods/Services Sold. Another chunk of that dollar pays for your business overhead (rent, insurance, employee salaries, utilities, etc.). What’s left over is known as cash flow or earnings before interest, taxes, depreciation and amortization (EBITDA).
When you reduce expenses, you increase cash flow. Cost reduction is a force multiplier because one dollar of cost savings is worth more than one dollar of revenue. Here’s an example:
In this example it takes $5.00 in revenue to generate $1.00 in cash flow:
Revenue: $100 ÷ $20 in Cash Flow = $5.00 (a 5:1 ratio)
So, if you are able to cost cut and generate $10,000 in cost savings, it would be the equivalent of generating an additional $50,000 in revenue.
$10,000 in Cash Flow x 5 (the number of revenue dollars required to produce 1 cash flow dollar) = $50,000.
You are already actively invested and engaged in growing sales. How quickly could you generate an extra $50,000 in sales? How much additional effort and investment would be required to achieve that incremental growth (use this handy little cost reduction calculator to answer this question)?
Just as the military uses tactical decisions to gain immediate advantage or success, you can use expense reduction to achieve the same positive impact on your cash flow.