If you’re like most of us, your growth plan next year is all about some percentage of an increase in sales. Commensurate with that will be some increase in costs and expenses. Both of these are based on your current financials – what do they look like this year and over the last several years. Those give us the confidence to project into the new year.
During this time of year, I am often reminded of a lesson I learned a long time ago – about the difference between cost and expenses and investment for the purpose of a return.
What if you turned your thinking around?
I had recently sold a successful business to a partner that I had been in business with for over five years and had taken a position managing a struggling computer software-hardware distributor for a large privately held company. Our first year was nothing to brag about but we finished within our budget. The second year, however, was all mine: I set the budget, the sales projections, and other important operational details.
Since this was a foray into the new world of computers, the entire company leadership was focused. And a big reason I was attracted to the industry and the company. As we got into the year, it became painfully clear that we were not on track to meet our sales projections. So I began the process of paring back on expenses. Keep in mind that I had spent the previous five years in my own business, so I was watching the financials like they were my own.
In a progress and status report meeting with Ron, the company president, I was asked about the sales numbers. What were my thoughts on why we were not meeting sales projections and what my ideas were to turn them around and begin hitting them? In our discussion I made the comment that while we were not meeting the sales objectives, I was also closely monitoring and cutting our expenses so as to not get them out of alignment. His response was a wake-up call.
“Why would you do that?” he asked.
“Well, it just stands to reason that if we’re not hitting our sales numbers, we had better be cutting back on our spending.” I said, thinking, again, that this is exactly what I had been doing in my own business.
“Dave, you’ve got to change your paradigm, here.” He said. “In this business, we budget our expenses based on what it’s going to take to make the sales numbers. You have been given a budget that would drive the sales number. Why in the world would you cut back on those if you’re not meeting your sales? You’ve got it backwards. We’ve given you that money in order to achieve the sales number – that’s our return on our investment. If you’re not hitting your sales number, you need to evaluate why and how you can find the right investment to make those numbers – not cut back on the investment.”
Now, I’m going to leave that discussion right there and let it settle in. Because if you’ve been running a business for any length of time, you’ll get what Ron was driving at. We get into the habit of projecting sales and costs with the same attitude. We set the sales number and then try and figure what our costs need to be in order to hit that number – based on what we did last year. This is standard thinking. Growth thinking is another paradigm – it’s a slight twist. But that twist can bring you great rewards. Here’s the twist, if you haven’t already figured it out.
After you finish your regular projections. Reverse your thinking about your financials. Instead of thinking about what the top line is and then what your costs are going to be to achieve those. Think, instead about your costs first. The new thought: “If I spent that kind of money on a new investment, what would I want my return to be? The same as last year? Maybe a 10 or 15% increase?” How about, “What if an investor came in today and offered me a check for the amount of these expenses? What would he and I agree on would be the right ROI? What sales level and what bottom line should that check amount drive?
Additionally, throughout the year – you’ll be asking a different question. “Am I getting the return on my investment that I wanted? If not, why? Am I spending my money on the right things and people to achieve that?” This as opposed to, “I’d better cut back somewhere because I’m not hitting my sales numbers.”
I know this sounds like a minor difference, but I can’t tell you how many times I observe this. Thinking of cutting costs as opposed to evaluating ROI those costs should be driving.
Either you’re driving those costs in order to hit your ROI or the costs are driving you.
Change your paradigm and see if you don’t see a significant change in your business.
Blessings my friends.