Cost Control in a Stable Business

In cost control, an ounce of prevention is worth a pound of cure. Everyone knows that it's much harder to shed a few extra pounds than to avoid gaining them in the first place. Nowhere is the saying "an ounce of prevention is worth a pound of cure" more true than in cost control. It is crucial to closely monitor that during growth periods, costs do not increase as quickly as revenues and, conversely, during recessions, they decrease at least as rapidly as revenues. One example is one of the world's largest pharmaceutical companies, whose revenues increased almost eightfold from 1965 to 1995, taking inflation into account. Throughout these 30 years, the company maintained a consistent ratio of cost growth to revenue growth: a maximum of 6% cost increase for every 10% increase in revenue. After five or six years of efforts, the company also learned to reduce costs proportionally with revenue declines during downturns. The skills acquired became an integral characteristic of the company. TIP OF THE DAY: Strive to maintain a constant ratio of current cost growth to current revenue growth. Ensure that during downturns, current costs decrease proportionally to the decrease in current revenues.