Karl Stark and Bill Stewart Co-founders, Avondale Strategic Partners, seem skeptical about any strategy that is touted as increasing profits while cutting revenues. And so they are wary of cost-cutting as a path toward growth. At Inc., they share three questions that executives should ask when embarking on a cost-cutting plan:
1. What costs and investments are required to maintain the existing or projected revenue base?
2. Which costs or investments will impact revenues in future years – positively or negatively?
and 3. Will your cost cutting necessitate further cuts in the future, creating a snowball effect?
When cost reductions cut to the bone and beyond, the inevitable result is a snowballing sequence of profit declines. The lack of critical sales, marketing, R&D, and other investments will likely reduce revenues, which leads to additional cuts. As the pace of revenue declines increase, profits will eventually evaporate and the business will not have the ability to recover.
In short, Stark and Stewart recognize the need to cut costs. But if cost-cutting is the goal rather than growth, then, as many newspaper executives have found out over the last decade, the need for cost cutting may never end.
Read You Can't Cut Your Way to Growth here.
02-16-2012 2:47 PM