It all depends on which world you’re in…
What’s that you say? That doesn’t make sense to you?
Well, it might if you think about it a little. When we experience cash shortages, our behavior changes, and sometimes it’s not always for the better.
Let me introduce you to two different worlds:
- The Cost World
- The Throughput World
The Cost World
In the Cost World, we are very focused on costs. We look at every single expense and try to reduce it. We also tend to be obsessed with allocating all costs against the production of income.
But isn’t that a smart thing to do? After all, that sounds like it’s critical to make sure you’re charging the right price that covers your costs and leaves you with a profit.
So why is that dysfunctional? Well, what if it affects the throughput world.
The Throughput World
In the Throughput World, we are paying attention to the speed/pace of the business, and the amount of money we are making (yes, throughput always ends up as cash in the bank).
Well, often these two worlds collide and are in conflict with each other. So which one wins the battle? The one we pay the most attention to. And if we take actions to cut expenses that reduce our throughput, we might end up in a worse place than where we started.
Another way to look at this is with a dieting metaphor. If you decide to diet, you can lose fat, and you can lose muscle. Losing muscle is like losing throughput – it restricts the ability of the business to produce income. Losing fat makes you leaner and more efficient thereby boosting your profitability,
How does that happen? Great question!! Let’s say you have idle capacity in one functional area. You might look to reduce expenses in that area. Most of the time, those expenses tend to be people. So you reduce your headcount and lay off a couple of people. Sounds good so far? Maybe… But what happens if that change reduces the capacity of that function, and causes the overall throughput of the company to drop? In other words, you might have just created a bottleneck in your operations that constrains throughput.
Additionally, how might this action affect the other employees? What message does this send? Lay-offs tend to have a deflating effect on employee motivation. And loss of motivation can degrade throughput.
Further, what if some costs are not really reducible? Have you ever tried to tell the landlord you’ve decided to reduce your rent? Or your bank that you are stopping payments on a loan? In other words, some expenditures are fixed, and cannot be changed.
So in the name of doing something good, you just deflated your throughput, or cash flow.
The best solution is to live in the throughput world. Why? Well, because in this world you must be focused on generating the highest contribution to overhead costs and profits. Of course you should have budgets in place to manage costs, but that generally is good enough.
Need some help to assess and improve your throughput and increase your cash flow using our Profit First Cash Management System (PFCMS)? We are ready, willing, and able to help!!
