As your business grows, operational efficiency becomes increasingly important to sustain profitability. For businesses generating between $1 to $50 million in revenue, identifying and pulling the right operational levers can unlock substantial cost savings, and this process doesn’t have to be overly complex. Drawing insights from some of the most celebrated business frameworks, such as The E-Myth Revisited, Secrets from the Berkshire Hathaway Managers, and Profit First, you can develop a methodical approach to cost reduction that also strengthens your overall operations.
Here’s how you can zero in on the right levers to pull for operational success and cost savings:
1. Understand the Core Operations
Michael Gerber’s The E-Myth Revisited emphasizes the importance of creating systems that operate with precision. He notes, “The system runs the business, and the people run the system.” Begin by mapping out your operational processes in detail. Ask yourself:
- What are the key components of my production or service delivery process?
- Where are the bottlenecks or inefficiencies?
- How do my current systems affect profitability?
By understanding how every system and process interacts within your company, you will begin to see where improvements can be made. Gerber suggests that entrepreneurs often fail because they work in their business instead of on it, and this mindset shift is crucial for identifying operational levers that drive cost savings.
2. Leverage Financial Data to Identify High-Impact Areas
The financial principles laid out in Mike Michalowicz’s Profit First provide a straightforward but revolutionary perspective on handling cash flow. He advocates, “The biggest driver of profitability is not revenue but expense control.” By focusing on managing your expenses rather than just increasing sales, you can ensure that your cost savings directly contribute to your bottom line.
To pull the right financial levers, review the following data points:
- Cost of Goods Sold (COGS): Can you negotiate better terms with suppliers or streamline your inventory management?
- Fixed vs. Variable Costs: How much of your costs are fixed, and could shifting more toward variable costs provide flexibility?
- Labor Efficiency: Can you cross-train employees or automate tasks to reduce labor costs?
With this approach, categorize your expenses in a way that helps you easily identify where savings can be made without compromising the quality of your products or services.
3. Emphasize Operational Excellence: Borrow from Berkshire Hathaway’s Best
In Secrets from the Berkshire Hathaway Managers, a recurring theme is the power of operational excellence as a driver of profitability. Warren Buffett himself often praises companies that run like “well-oiled machines.” Operational excellence is about ensuring that every dollar you spend provides maximum value.
Examples from Berkshire Hathaway companies show us that small, incremental improvements in operations can have an outsized impact. For instance:
- Logistics: One of Berkshire’s companies, BNSF Railway, achieves operational excellence by reducing downtime in its fleet through advanced maintenance practices. Similarly, reducing wasteful practices in your company’s logistics can save significant costs.
- Procurement: In another example, suppliers at Berkshire subsidiaries often operate under tightly negotiated contracts, reducing costs year-over-year. Businesses of all sizes can focus on renegotiating with key suppliers or considering alternative materials.
“The best investment you can make is in the quality of your operations,” the managers agree. Identifying inefficiencies, waste, or underutilized assets within your organization can help uncover high-potential cost-saving opportunities.
4. Prioritize and Plan for Maximum Impact
Once you’ve identified key areas where you can improve, it’s critical to prioritize these actions based on their potential impact and ease of implementation. Start with “low-hanging fruit” — initiatives that are relatively simple to execute but can yield significant cost savings. Gradually move toward more complex or long-term solutions.
Develop an action plan that includes:
- Clear Steps: Break down the tasks necessary to achieve the cost reductions, detailing responsibilities.
- KPIs and Metrics: Define success metrics for each initiative, such as cost reductions, process improvements, or employee productivity.
- Review Cycles: Regularly review the progress and fine-tune your initiatives. As business conditions change, so might your priorities.
5. Communicate and Involve Your Team
Gerber, Michalowicz, and Buffett all emphasize the importance of involving the right people in your business. Gerber, especially, stresses the need for businesses to operate like franchises — with clear roles, responsibilities, and processes that anyone can follow.
Make sure to:
- Involve Key Stakeholders: Your leadership team, department heads, and even your front-line employees should have input into how your business operates and where improvements can be made.
- Create Accountability: Assign clear ownership of cost-saving initiatives to ensure that changes are implemented effectively.
- Incentivize Savings: You can also incentivize team members to identify cost-saving opportunities. Consider offering bonuses tied to reduced expenses or improved efficiencies. At 575ASM partners are incentivized to give gift cards to employees that identify bottlenecks in our processes.
6. Monitor, Adjust, and Repeat
Achieving cost savings is not a one-time activity. As you implement changes, it’s essential to monitor the results and continuously adjust your approach. Michalowicz in Profit First insists, “You are always one tweak away from growing profits.” The key is to be relentless in tracking the performance of your initiatives and ready to pivot when new opportunities arise.
Set regular review periods—monthly, quarterly, or annually—to evaluate the effectiveness of your efforts. Over time, this discipline will help you find additional savings that you may not have initially considered.
Conclusion: Operational Levers that Drive Sustainable Growth
In summary, for businesses with revenues between $1 to $50 million, identifying the right operational levers to pull for cost savings requires a thoughtful and disciplined approach. By understanding your core operations, leveraging financial data, aiming for operational excellence, and involving your team, you can uncover significant savings without sacrificing quality or growth.
As Gerber emphasizes, working on your business rather than in it will allow you to systemize success. Likewise, Michalowicz’s simple but effective profit-first principles will ensure that your cost savings are meaningful and lasting. And finally, by emulating the operational excellence found in Berkshire Hathaway’s companies, you can drive continuous improvement and sustainable profitability.
Call to Action: Is your business ready to identify and execute operational levers for cost savings? Contact us today for a financial analysis and strategy session tailored to your company’s needs!
