Almost every small business owner I interviewed noted that it was especially diffi cult to maintain spending and saving awareness during good economic times. When profi ts are up, the economy is healthy, and the company’s strategy appears sound, small busi- ness CEOs tend to be free with their spending. As one individual told me, “If I don’t make that major new investment in equipment now, when am I going to make it?”
Spending on necessary improvements or new initiatives makes perfect sense when cash is rolling in. At the same time, however, you can be vigilant about spending even as you’re writing the checks. This may seem like a paradox, but you can manage spend- ing effectively if you remind yourself that the profi ts and the rosy outlook that allow you to spend now won’t exist in a matter of months . . . or perhaps weeks!
One of the company CEOs I interviewed has adapted a Japa- nese business practice to keep his eye trained on saving money
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even in the best of times. As part of his business improvement pro- cess, he asks the question “Why?” fi ve times to fi nd the root cause of a problem or its solution. Therefore, when someone presents him with a proposal to purchase new software for the company, suggests that they increase the sales department’s travel budget, or insists that they must move to a larger facility, this CEO asks questions such as: “Why do we need a larger facility? Why will the facility we’re considering purchasing meet our needs better than the one we have? Why don’t we examine the pros and cons of add- ing on to our current facility?”
Finally, and perhaps most importantly, you should communi- cate that cutting costs and spending wisely are positive rather than negative actions. During good times, especially, no one wants to come across as being risk-averse or a pessimist. People are reluc- tant to raise their hands and question expenditures, even when their instinct or their knowledge tells them that something is a waste of money. Small business owners must communicate a posi- tive attitude about frugality regularly. Following are some ways our company and other small business owners do so.
Keep a dialog going about cost-saving innovations. This especially includes those that are implemented. This dialog can be informal chats between department heads and their employ- ees about who suggested what and how it helped the company save money. Some companies have a more formal approach, issu- ing memos or reporting the savings method in a newsletter. Still others send e-mails to everyone in the company about a creative approach. Whatever method you choose, try to make this an ongoing dialog that becomes part of the culture rather than a one-time discussion.
Reward individuals who come up with signifi cant spending or saving ideas. One of the companies I talked to has made this a major competency that is assessed during performance reviews.
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29 The Recession Test and Other Consciousness-Raising Tools
Every manager in this organization knows that fi nding ways to be cost conscious is expected and fosters this behavior in the employ- ees. At our company, bonuses are tied to cost-saving programs and plans. Just the other day, my purchasing manager told me that our grinding wheel supplier had made a mistake and some wheels were too small in diameter. Normally, we reject wheels that are too large or too small (it is not an uncommon problem), even though it doesn’t affect functionality and results in only a 5 or 10 percent loss in the wheel’s life. Our purchasing manager, though, decided to negotiate with the supplier for a better price on the wheels that were slightly irregular and ended up buying a batch of $78 wheels for $50, resulting in a $600 savings.
Use the sawmill metaphor. Bend over backward to commu- nicate that you don’t want people to be cheap and that you really do get what you pay for. You’re going to need to reiterate this point, since some people always think that being cost conscious means squeezing every penny that crosses their path. A more apt way to explain the goal of cost consciousness is by explaining your philosophy of getting the most out of what you have and what you spend.
The sawmill metaphor conveys this concept nicely. Sawmills try to get the most out of every log they cut because raw mate- rial costs are one of their biggest expenses. They try to optimize the number of board feet of lumber from every log and minimize the amount of sawdust and trim waste. To this purpose, they scan each log before cutting to fi gure out how they can obtain the most board feet from the log. They position the log exactly the right way and use the thinnest saw blades available to help achieve this goal. They then use the sawdust and wood chips produced by the cutting as fuel for the kilns that dry the lumber. Nothing is left to waste, but they use top materials and produce a top-quality prod- uct. This is exactly the philosophy that helps create cost-conscious but not cheap employees.
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