Making Profit From Cost Cutting
by Frederick H. Neu
and Productivity Improvements
Versus Increasing Sales Income
If you need to invest in research and development, automation, new systems or other areas to make significant improvements and help your organization be more successful, consider initiating a cost cutting and productivity improvement program.
Cost cutting, productivity improvements and increasing sales income should all result in more profit for a company.
There are some distinct advantages of cost cutting and productivity improvements over increasing sales income to make more profit. This is especially true when an organization is experiencing cash flow problems, because many cost cutting and productivity improvement results can be obtained without requiring capital expenditures.
If you identify and eliminate $50,000 in unnecessary expense it begins hitting the bottom line immediately as profit.
On the other hand, if you make 10% profit on increased sales income, you would need $500,000 of increased sales income to make a $50,000 profit. If you make 5% profit on increased sales income, you would need $1,000,000 of increased sales income to make a $50,000 profit and so on.
Also, most savings from cost cutting and productivity improvements automatically recur year after year, because if you hadnt eliminated the cost or made the productivity improvements, you would continue to incur the costs associated with them. However, you would need to keep increasing sales income year after year to realize similar profit from sales.
For most companies, there is usually a significant time delay and cash outlay investment before increased sales income translates into profit, including an investment in some or all of the following areas:
- Inbound shipping to bring in raw materials, purchased parts, equipment and supplies
- Raw materials and purchased parts
- Manufacturing overhead
- Outbound shipping to deliver product
- Time for the billing and collection process
Cutting costs, improving productivity and increasing sales income take commitment and effort, however the rewards can be great.
Imagine your satisfaction after completing a successful cost cutting and productivity improvement program, then having the enjoyable task of putting the resulting savings to work in your organization. The rewards are worth the effort.
Mr. Neu has contributed to numerous books on Supply Chain Management and Lean Manufacturing.