Streamlining Costs to Drive Revenue: A CFO's Guide to Financial Optimization
All of our clients go through an onboarding process of some kind. We always complete a deep dive into their financials regardless if it’s a one-time project or ongoing services. As part of this, I tend to uncover a lot of “costs'' that are not driving revenue. This is incredibly common and there’s no judgment. And still - if you want to take your business to the next level- you have to understand the difference between what drives costs and what drives revenue. Ideally there’s a very minimal amount of dollars that are true costs and most of the money you’re spending is pushing more revenue.
Let’s do some definitions:
Revenue Driver: $$ spent in your business that directly or indirectly impact revenue
Examples: Hiring a Sales Rep, Instagram Ads, Guesting on Podcasts.
Cost Driver: $$ that does not directly or indirectly drive revenue
Example: branded clothing, a new desk, having to replace the office fridge, office snacks when you work for yourself
Let’s talk about the MASSIVE trap that all business owners are capable of falling into at one time or another… the “I have a business so I NEED this” trap. This can be anything in your mind that you thought you needed to have when you started a business. Sometimes it's small like a mug with your logo on it, and sometimes it's a huge expense like a fancy office. Either way, it is super common so don’t beat yourself up over it. And do notice that there are a lot of things you really don’t need to run a successful business. I can make a case for why even some things that seem frivolous actually do drive revenue (the occasional team retreat and swag) and why other things that seem necessary (a virtual assistant) are not actually necessary for some businesses.
How do you avoid the trap?
Create a budget
Scrutinize that budget to really think through every dollar going out
Review your expenses at the end of every month
Track KPI’s to deeply understand what is driving revenue
Adjust, spend more where you can see revenue results, spend less where you don’t
Repeat
A few stories:
One of my clients is an earlier stage SAAS business. The revenue generation side isn’t a fully built machine yet. Meaning- it’s been bumpy. They’ve been going through a few iterations of their sales machine to get it working to drive revenue. There’s been some money spent building and creating the process, getting the right people in place, and setting up the right metrics to track. These are not wasteful $$ spent and I wouldn’t consider any part of that spend a cost driver. It was just a longer than planned road to being a revenue driver. Don’t go so far into reducing costs that you can’t take time to get that sales machine built. Now that client is close to being on track with the forecast and scaling their business!
Another client of mine is so fantastic at running her business that she almost doesn’t (but still does!) need a strategic CFO. The business has amazing margins, they beat their revenue forecast almost every year and are steadily growing with very minimal continued investment into marketing & sales. One thing that I noticed when we first analyzed the past few years of the businesses is that they underspent in marketing significantly. Now, that business primarily sells wholesale and direct sales was an afterthought to them - so in some senses - they were a little lucky when they hit the market in B2C. However, now they’re almost 2 years into a steady growth of direct sales and still understanding marketing. At some point the streak they hit will wear out and new strategies or products are going to need to be created. My main point here is that you also need to plan ahead for revenue drivers. They often don’t come with luck, but with constantly measuring success and then repeating what’s working and stopping what’s not. For this client we’ve been working with them to track what’s working and investing in those areas to keep up that momentum.
One of the consistent cost drivers I see over and over again is - team meetings and team retreats. Team meetings are expensive! I’m a little cranky about team meetings because at one point in my life, I worked in a place that had “work weeks” where our team had back to back meetings for an entire week straight every month and so now I basically avoid meetings like the plague because I’m just more efficient offline and I don’t like my trauma triggered (kidding! I’ve mostly healed). That said, meetings are still very helpful- they’re also expensive- so use them wisely. If you want to know what a meeting costs, give all the attendee’s an hourly rate.
Now do this math:
Hourly rate x length of meeting (hours) x number of attendees = cost of the meeting.
If that meeting produces $100K of revenue and it only costs $500 then wonderful, BUT I think a lot of corporate meetings cost $200K and generate zero revenue.
I had a client briefly that had all their contractors on a call every week. I think on average the hourly rate was $150/hr per contractor + her and her founders' time. It was about 5 people and at least 2 hours long. That’s $150 x 2 x 5 = $1500 per meeting! Which added up to $6000 of spend per month. This was a lot for a business that was really early and not generating a ton of revenue. I do think meetings are super important. You still have to have meetings, you can’t nix them all (despite my efforts), but you can find ways to decrease them and your P&L will say thank you.
There is no one right answer for a revenue driver vs a cost driver. For some businesses, meetings (or other expenses) may drive revenue through the roof and for others-only hold them back. Some businesses might find that giving all their team members new swag every month increases employee satisfaction and brand awareness so in the long-run drives more revenue (happy employees = more chatting about the business to their friends and wearing swag = more revenue all the time). And for others - branded swang means nothing other than a goodwill donation in 3 months. I can’t answer exactly what’s right for your business right now, but I can tell you that creating a financial process and asking yourself the right questions will help you cut costs 100% of the time.
Here are the best questions to ask when looking at your prior month’s spend:
How did this spend increase revenue?
Take time and dig into it. Did your instagram paid ad directly bring in leads? Did the account manager you hired close a deal?
Does it help retain your employees?
If it didn’t increase revenue then ask: why do I need to keep this?
Is it part of a long-term strategy that will increase revenue? (i.e. content creation)
If you find a spend not directly growing revenue then ask: is there a way to make this drive revenue (i.e. rescoping contracts, shuffling responsibilities)? And if not, then cut it.
This can sound super harsh, but I don’t mean stop caring about people. Your business health means you can retain employees longer, offer more jobs, make more money to put back into the market to create even more jobs. So yea, cutting a small cost or a big cost now can feel harsh - but it can save a lot of pain later down the line.(and a much larger conversation for another time)
If you get to something you’re not sure about - then answer this: what metrics will show me if this cost is adding value? Set those up, track them and then measure it for 2-3 months.
A business is never going to be 100% efficient at using all the cash correctly. Some money has to be reserved to make mistakes and adjust. The ONLY antidote to spending frivolously is to manage your spending and track your KPI’s. Once you get the hang of that and start to see actual results on where you spend your money and your time then it’s a no brainer. You start to always look at those things and your business will grow.
