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Revenue vs Expenses? The bottom line is clear

September 14, 2007

The goal of your business is to make money. You need to show a profit on your P & L or all other business goals are moot. One obvious action is to cut expenses. But, At some point you need sales as well. We all know what a P&L looks like pluses and minuses are simple: sales are a plus and expenses are a negative. The goal is to have sales higher than the expenses. At what point does cutting expenses start hurting or become ineffective? When does looking for the lowest price end up costing the most?

Basically the above questions are similar and I’m using them to help round out the discussion. Lets use this current mortgage mess as an example. A homeowner looks to get the lowest priced mortgage possible; they find a 7-year ARM they can switch into. Four years ago that would mean $850 a month on a $250,000 note, the deal is done. In hindsight, maybe not such a great move. Here is another example: a new home buyer purchases a house for $250,000 with no down payment, a fixed rate for 7 years and interest only payments. They get a great LOW monthly payment and one would expect a first time buyer to make the minimum payments allowed. This would also allow their standard of living to rise higher than it should. Both of these are examples of bad decisions. The impact will, of course, be felt by all of us since many people made these bad decisions- IE lowest cost per month. In printing this happens many times with our clients, they play us off each other price wise, and we let them. It seems to me, it is too easy to get caught in a downward spiral with printers always competing on price alone. One solution is to buy all your competition and then drive the rest of the printers out of business. This oligopoly type situation sounds familiar, no?

Printers themselves are forced to push costs down to survive. With labor costs, sometimes they push to the point that they cannot attract the skills they need. Check out this blog: CLICK

In the end we can never cut expenses as much as we need to increase sales. I am a strong advocate of running a lean operation, but sales are by far and away the more important part of that P and L equation. And sales, is about quality, reliability, relationship, trust, and value. The sooner we get our clients and ourselves to start weighing the whole picture the better.

Just some thoughts.

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