When cutting costs is counterproductive

Improving profits without just cutting costs.

At MRO Accounts we can provide businesses in the Hemel Hempstead area with assistance and advice on a wide range of business issues. Here are some reasons why cutting costs is not always the best policy...

When business owners begin to think about developing profit improvement strategies, we often find they are expecting to embark on what is principally a cost saving exercise.

But there is a lot more to profit improvement than simply cutting costs. Indeed, there is a danger of cost cutting strategies becoming counterproductive if too much reliance is placed on them.

Diminishing returns

In our experience, once businesses have identified and realised major cost savings, the law of diminishing returns dictates that any further attempts to make savings will be less effective. If too much emphasis is placed on cost reduction there is a risk of cutting into productive capacity, and even inadvertently increasing costs.

Moreover, a sustained cost-cutting exercise can damage morale and create an atmosphere of pessimism. After all, you cannot grow by cutting back.

Tunnel vision

But perhaps the greatest danger of overemphasising cost cutting is developing tunnel vision and missing out on more creative, and often much more effective, strategies for improving profitability.

Profit improvement is a process that ranges across every aspect of your business. And often the most successful strategies develop from the most unlikely places. Profit improvement is as much, if not more, about increasing revenue, as it is about reducing costs.

Focus on profitability, not just cost

This is not to say that cost reduction has no part to play in profit improvement strategies. On the contrary, when included in a comprehensive and creative programme it can result in considerable improvements on the bottom line.

However, the key to successful profit improvement strategies is to ask not how much does a particular process cost, but how profitable is it?

If you are in the Hemel Hempstead area and would like professional assistance from experienced accountants and business advisers, contact MRO Accounts.

What our clients say:

“Working with Melody is an absolute pleasure. She handled my accounts with complete unflappable professionalism and navigated her way thought the HMRC hoops. In my first year of business I was employed, unemployed and self-employed, all within 12 months - not a simple situation! And she does it all with a smile :)”

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