We Boomer business owners all know what a unit of (whatever) costs associated with a unit of (something) we sell. Its called cost of goods sold or COGS. That’s Business 101 … BUT …. What does a unit of your revenue ACTUALLY COST? I invite you to look at this question in a different light.
WHY? Because in TOUGH TIMES we Boomer owners have a serious tendency to not only BOTTOM FEED for clients who generate BAD REVENUE, we also have a tendency to THROW OUT THE BABY with the bath water or CUT OFF OUR NOSES to SPITE our FACE in terms of our own operations … all in the name of fiscal responsibility and other noble causes.
Very few of us can justify full-blown cost accounting in our businesses, accounting that fully allocates costs to revenue down to a gnats hind quarters of detail … BUT … WE HAVE A STRONG SENSE of how and why we allocate operational resources in support of our particular types of revenue generation. This intuition and common sense is our starting point.
Take the following (5) VIEWS into consideration when looking at both pure COGS and all other operational costs (direct and indirect) that support your revenue model.
Hints from the Field: This is not a number crunching exercise, it is a Bottom Line Thinking exercise.
1 – CRITICAL PATH VIEW – Walk through your revenue generation CRITICAL PATH and identify the major direct and indirect resources/costs associated with a unit of revenue or service provision in your business. Mentally allocate major costs to major revenue.
2 – QUALITY VIEW – Assess your critical path and its required resources in terms of contribution to QUALITY. Ask questions like: “If I reduce this admin person …. how does it impact the quality of the widget I build or the unit of service I deliver?”
3 – VALUE VIEW - Assess your critical path and its required resources in terms of contribution to PERCEPTION OF VALUE. Your company may be delivering high quality products and services that are NOT actually perceived as such. Ask questions like: “What relation does this resource/cost have to my clients perception of value of the products and services that I am delivering?”
Hints from the Field: Unfortunately, on this planet, perception is reality. Keep your quality high and make sure your client’s and customer’s perception matches reality.
4 – RELATIONSHIP VIEW – Consider all of your VENDOR and SUPPLIER and CONTRACTOR relationships and ask yourself … “What has changed FOR THEM in these hard economic times … what can I do to make these relationships better? What can I do to reduce THEIR costs to support me?”
Hints from the Field: A dollar in cost reduction from a vendor or contractor has a multiplier effect on your bottom line in that it shifts a dollar of resource (from) not in your control (to) into your control …. AND when combined with a quid pro quo ‘hard times’ vendor relationship tune up …. everyone wins.
5 – SUSTAINABILITY VIEW – Are your revenue generating critical path resources sustainable? How many key and direct contributors to revenue are Baby Boomers who will retire or draw down in the next few years. What key skills and knowledge and wisdom is currently in the mix of the resources that are applied to revenue generation, and what happens if it walks out the door? Ask questions like: “What would it cost me to replace the current engine of my revenue? What is the outlook for the cost and availability of key components of my product offering?”
