There are two important steps required to achieve effective cost reduction in your business. The first step is to have a well thought-through strategy in place. The second step is to understand the enormous impact your leadership has on your business.
In the 40-plus years EMyth has been involved in the small-business arena, leadership has always emerged as one of the key characteristics of a good business manager.
When it comes to your finances, we cannot emphasize enough the important role that you, the business leader, play in the financial health of your business. Good leadership is the single most important skill a small-business owner can develop to reduce operating expenses.
Financial leadership in action
To illustrate excellent leadership skills in managing operating-cost reduction, we need to look no further than our own clients.
The heroine I'm thinking of in the financial leadership category is a business coaching client, Pauline, who owns a successful real estate agency. Through EMyth's business coaching program she evolved from an average leader (her assessment) to an exceptional leader (our assessment). By the end of the program, she came to believe fervently that leadership in business is much more important than she had ever thought possible. And to remind herself of this revelation, she had a sign made that sits on her desk at work that quotes EMyth founder Michael Gerber: "Your business is a reflection of how you show up as a leader." She says the sign helps remind her that good leadership is a choice she must make intentionally each day.
Gathered from the many conversations we had together, here are just a few examples of how Pauline applies good leadership to reducing operating costs in her business.
- She believes cost reduction starts with her. Hence, she models cost control. For example when she travels for business, she flies coach instead of first class, leases inexpensive cars, stays at less expensive hotels. She does whatever it takes to show her employees she is sincere about reducing costs.
- On another level, her key people understand that budget proposals are exactly that-proposals. In a nice way, she challenges all requests for expenditures and requires her team to come up with well thought-through plans that focus on the returns expected. And then she holds them accountable for every dollar.
- Pauline prides herself on being intentional about the financial decisions she makes. For example, she established an annual budget process, whereby, in November of each year, she gets together with her team to create a budget for the following year, the deadline for which is December 15. The discussions in this budget process session always focus on her profit objectives, achieved by increasing revenues and reducing operating expenses.
- She put systems in place for reviewing financial statements each month. During these review sessions, she focuses on the budget, comparing the actual results with the budget numbers, paying particular attention to operating cost variances.
- Pauline learned to step back from her business and look for opportunities. One cost-reduction opportunity that emerged in the past year was outsourcing. For example, she foresaw great cost savings in outsourcing her human relations and accounting activities. But she also understood that she had to define the standards by which the outsourcing company would do the work.
- She spends a lot of time improving her negotiating skills. She's learned to challenge every price offer to the point where her regular vendors understand she will fight them for every dollar. But, as she bargains in such a nice way, and as she is always fair, her suppliers have come to respect her for it.
- She understands that her recruiting and hiring processes are critical components of cost reduction. She has systems in place for reducing the risk of selecting the wrong candidates and for keeping employees accountable for the results they agree to achieve in their positions.
Good Financial Leadership and Cost Control
Pauline's story is a shining example of excellent financial business leadership. Here are some tips to consider, from the EMyth Point of View, that relate to establishing good cost control.
- Set a good example. Cost-reduction starts at the top. In good times and in bad, always show your employees that you are personally involved in reducing costs.
- Keep yourself accountable. If you can't hold yourself accountable, how do you expect to hold your employees accountable? Good leaders have systems in place to track and monitor the progress they make towards achieving the company's objectives-objectives such as finding less expensive ways of doing things.
- Manage your time. Don't waste time. If you can't manage your own time, you can't expect your employees to manage theirs. Time wasted is a huge drain on profits. For example, if you come in late and/or leave early, if you are consistently late for appointments, or you don't pay your taxes on time, etc, there are serious repercussions. Remember, your employees notice everything. So, consider reducing operating expenses by managing your time well. Your employees will follow.
- Never abdicate control of your finances. As a business leader, you need systems in place to ensure you personally review financial information on a timely basis. Never give control of your finances to someone else.
- Build a culture that values cost control. As your people begin to follow your good example, they will start to find new and more effective ways to reduce cost. Be sure to lavish them with praise and reward their efforts.
- Refine your negotiating skills. If you don't negotiate well, make refining your negotiating skills a priority. And remember, negotiating is not about "beating up' your suppliers. Negotiating is about understanding your needs, their needs, the attendant market conditions and coming up with a win-win solution.
- Perfect your recruiting and hiring process. A bad recruiting and hiring process can cost you dearly (see our article 5 common hiring mistakes.) You need to be very clear about the results you want from both processes.