Wednesday, June 20, 2012

The 10-To-1 Relationship Between Sales and Costs


In today's ailing economy, when every dollar counts, hospitals are looking for ways to improve their bottom line. One option is to add $11.7 million in revenue. The other option is to reduce operating costs by $100,000. According to Deloitte (formerly Deloitte & Touche), these two options have the same impact, but clearly one is more achievable.

As I have long argued on this blog (1, 2, 3, 4), increasing revenues is only one option to maximizing profit. But the far better option is the elimination of costs. Unfortunately, too many CEOs take the easy route to cutting costs by laying off workers. However, once you have trimmed all the payroll fat, there are still plenty of areas to look for cost reductions:
  • Look at cutting executive perks. 
  • Reign in expense accounts. 
  • Identify and eliminate errors in production. 
  • Travel costs can usually be trimmed drastically.
  • IT budgets can be slashed by the strategic implementation of cloud computing.
  • Review existing contracts to find possible savings.
  • Consider in-sourcing alternatives
More importantly, cost control is all about focusing on the core competencies of your business -- what do you do better than anyone else that makes you money. Focus on that and find ways to support that function while reducing costs that don't directly impact that core competency.

It's exciting to have a major financial firm back up arguments in favor of cost cutting as more effective that new revenues. When there's a 10-to-1 relationship between them, it makes sense to grab the low hanging fruit first. 








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