You Can’t Cut Your Way To Profitability.

If a business wants to increase its profits, it needs to do one of two things – increase its revenues or cut its costs. It sounds like a no-brainer, but I am often surprised by how many people only remember the second option (cut costs) and forget about the first option (increase revenues).

A small business that is struggling to make ends meet will often approach this problem from a cost-cutting standpoint: Which costs can I cut to get me back in the black? While this strategy can help in the short-term, it can have negative effects in the long-run. For a business to grow, it must increase its costs. Right? You need to hire more people. You need to update your technology. You need to move into a larger facility. As a CFO, I actually want to see your costs INCREASE over time…not decrease!

The long-term, lasting solution to a profitability problem is to increase revenues. There are only two ways to do this – increase your prices or sell more units. Both of these strategies require a strong sales and marketing infrastructure for them to be successful. Without a strong brand, for example, your increased prices may be rejected by the marketplace. Without a strong market presence, you will find it difficult to expand your market share, break into new markets, and find new customers.

So the real solution to a profit problem is to strengthen your sales and marketing practices! Resist the urge to cut your sales and marketing budget when times get tough. If you are in triage mode, look for other areas to cut back on. But do not decrease your marketing spend, as that action can have detrimental effects on your long-term success.

I advise clients to spend between 5% to 15% of their revenue on sales and marketing activities, depending on the life cycle stage of their business and their industry. For example, for a brand new business that is competing with more established brand names should spend closer to the 15% mark. A business that has been around for a long time, has a great reputation, and has a strong customer base, may be able to scale back to the 5% mark. For a small business that is in growth mode, I definitely advise keeping yourself in the 10% to 15% range – otherwise you’re going to have trouble attracting new sales as your capacity costs grow, and risk going into the red. Anything less than 5% and you are at risk of hurting your business.

By the way, the total cost of your sales and marketing spend should factor in the amount of time that you (the business owner) spends in that area. As a small business owner, you most likely drive the sales and marketing activities of your company. How much time do you spend in this area? Multiply this time by your “hourly pay rate” and that will give you an accurate reading on how much you’re truly spending on these activities.

Are you struggling with your profits? Or need help figuring out how to set your sales and marketing budget? We can help. Please schedule a free consultation and let’s chat!