This question faces every business from time to time, and the balance between the two can make or break the business.
When I was a manager at Myer—a department store chain here in Australia—it seemed that every Christmas we would come into the peak period of the year with sales down on what had been targeted. We would invariably have orders from Head Office to cut salaries and cut costs to meet the budgets that had been forecast. Every year the result would be that we would have fewer customers coming in the door because the advertising budget had been cut, and fewer staff to serve them when they did come; and these two things resulted in even fewer sales.
But the stock had already been ordered six months beforehand and it kept arriving. So we would end up with all of the staff focused on handling the stock that was piling up; we would pay extra for storage space and would have to cut the prices even harder after Christmas, a cycle that meant Myer was sold to an overseas company whilst it was losing $130 million every year.
Alternatively, I know a business owner who told me he used to solve every problem in the business by getting out promotion and pushing sales. This is a sensible action, and it certainly served him in good stead for a while. It even won him “Young Australian of the Year” for the growth he created in his business. Unfortunately, he got his promotion and sales done in such a way that he increased his debt load. Furthermore, he never engaged in any sort of economy or reorganization. The end result was that he kept driving the debt of the business up in order to get sales to cover the debt, and this resulted in him eventually having to sell the business while it was losing money so he could get his sanity back.
Here we have two large businesses, both of which could have been successful, struggling with the same question. And both businesses are still struggling with the same question at this writing.
When should I promote and when should I cut costs?
Fortunately there is a correct balance and sequence to sales, marketing and cost-cutting that works for every business. There are simple formulas that you can use and apply in order to know when to promote and when to cut costs.
L. Ron Hubbard wrote the Conditions Formulas, which describe the exact steps to take to improve the condition of an area. As you will see, some of the answers are surprising, and they may cut across common advice from accountants who tend to be focused on cost cutting, and may be adverse to spending on marketing campaigns when the profit and loss statement looks weak.
One of the key things to learn is the sequence in which one economizes vs. getting sales and promotion done. This is so important that Mr. Hubbard described a violation of the the proper sequence of the steps in a condition formula as “fatal”!
I’ll give you an example of how these work.
When your sales are stalled, when production is seen to be declining or unchanging, this would indicate the condition of Emergency. When you are in this state, do you economize, or do you get busy selling?
To quote from the formula for the condition of Emergency:
“1. Promote. That applies to an organization. To an individual you had better say ‘produce.’ That’s the first action regardless of any other action, regardless of anything else, that is the first thing they have to put their attention on.
“Exactly what is promotion? Well, look it up in the dictionary. It is making things known. It is getting things out. It is getting oneself known, getting one’s products out.
“2. Change your operating basis. If, for instance, you went into a Condition of Emergency and then you didn’t change your operation after you had promoted, you will just head for another Condition of Emergency. So that has to be part of it. You had better change your operating basis because that operating basis led you into an Emergency.
“4. Prepare to deliver.
“5. Stiffen discipline. Part of the Condition of Emergency contains this little line of ‘you have got to stiffen discipline’ or ‘you have got to stiffen ethics.’
“To an individual, this would simply mean not go down to the pub every Friday night. Stiffen discipline. Stay home and burn the midnight oil, do one’s homework, etc. Be a little more regular on the job, work a little harder, don’t goof quite so much, don’t make so many mistakes. All of this would be part of stiffening discipline.”
Any Emergency condition in a business can be traced to the problem, at least in part, of economizing instead or promoting, not having enough promotion, not telling enough people about what you do, and not getting enough sales. And just like the example of Myer, the result is a smaller organization. Don’t wait until it’s too late; promote now.
But what about when things are going well?
During affluent times, most organizations go on a spending spree. But believe it or not, cost-cutting actions are most indicated when income is skyrocketing!
This may seem like the world in reverse, but let’s look at what L. Ron Hubbard has to say about the condition he termed “Affluence” (a condition that is characterized by income going steeply up one week, or is steeply up week after week):
“1. Economize. Now the first thing you must do in an Affluence is economize and then make very, very sure that you don’t buy anything that has any future commitment to it. Don’t buy anything with any future commitments, don’t hire anybody with any future commitments—nothing. That is all part of that economy. Clamp it down.
“2. Pay every bill. Get every bill that you can possibly scrape up from anyplace, every penny you owe anywhere under the sun, moon and stars and pay them. Pull everything down in all directions until you have got it down to as close to zero as you can get or at zero.
“3. Invest the remainder in service facilities. Make it more possible to deliver.
“4. Discover what caused the Condition of Affluence and strengthen it.”
So in both conditions, there is a step to economize, but at different steps of the formula. If you apply economize at the wrong time, in the wrong condition, you will end up with a crash—and a smaller organization. Apply it correctly, and you’ll have a rocket ride.
It all depends on what your situation is. If your production is stalled or declining, pull out the Emergency formula and promote.
While I’ve given 2 formulas in this short article, there are actually 7 conditions one can apply to one’s income or production. Learn them. Use them. And hopefully you’ll be in Affluence or higher in no time.