I had lunch with an old boss and another exec recently. Among various topics we discussed, the following question came up:
What is more valuable, a dollar of revenue or a dollar of cost saving?
Around the table, both the execs and I knew which one we preferred and also knew that our preference is against the corporate line, for those of you playing along at home, the corporate line is cost saving. Not really a surprise.
Looking around on the web, you find that most personal financial advice toe this line pretty well. sticking with Benjamin Franklin’s well known phrase, “A Penny saved is a penny earned.” With some going to the hyperbole of a dollar saved is two dollars earned.
The corporate line follows the common approach, but ads an additional veneer to make it even more palatable for shareholders I guess. Cutting costs is seen as a predictable contribution to your bottom line. Every dollar you cut, you know is going to stay cut, whereas revenue is a fickle friend, here one year, gone the next.
Hopefully the cynics out of there are as appalled by this utter bullshit as I am.
The first problem is with applying the folk knowledge to business, there is a fundamental difference between saving money and cutting cost. When you save, you hold something back with the aim of using it on the proverbial rainy day, you save to spend. When you cut costs, you reduce your existing expenditure. I’m going to ignore the corrolary, you spend to save, since most companies ignore the direct costs of cost savings anyway.
The second problem is the corporate veneer, the seemingly solid fact that once it’s cut it stays cut completely misses the point that you still can’t predict your income. In fact I’ll even go further than that, when you focus your efforts on growing revenue and you’re successful you know you’re doing something right, and you can repeat that process to keep growing your revenue. When you focus on cuts, you’re not focusing on growing your top line, so instead of moving your business forward, you stay still… but the rest of the world doesn’t.
For every dollar you save, you’ve already lost the opportunity to make a dollar, and furthermore you’ve prevented yourself from establishing practices to let you earn even more dollars.
