What is a cost?
“Initiatives that focus on reducing expenses to decrease facilities expenses in order to improve the financial health of an organization.”
“Everybody is doing it; there is always fat to cut; we don’t have a choice; we have to remain competitive; ‘lean’ and sharp……”
We have all heard about cost cutting, but does it stand up to closer scrutiny?
I was invited to deliver a basic marketing session to a group of MSc in Finance & Accounting students.
Two questions they couldn’t answer:
- Where does cash flow come from?
- How do you define a cost?
Very disappointing if tomorrow’s CFOs don’t know that customers provide all the cash flow and profits. Even more worrying if they think that a cost is any large expense. Strangely, I wasn’t invited back the next year.
When I looked up the course references later, I was (almost) sympathetic:
“All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses.”
“The outlay or expenditure (as of effort or sacrifice) made to achieve an object.”
“In business and accounting, cost is the monetary value that a company has spent in order to produce something.”
“In accounting, cost is defined as the cash amount (or the cash equivalent) given up for an asset.”
“Cost includes all costs necessary to get an asset in place and ready for use.”
I also looked up the definitions for Investment:
“In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.”
“The act of putting money, effort, time, etc. into something to make a profit or get an advantage, or the money, effort, time, etc. used to do this.”
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.”
You can see where I’m going …
If this is the very best experts can come up with then no wonder finance departments may be unable to tell the difference between a cost and an investment. Cutting the wrong big number could destroy the business. And it seems any ‘big number’ is fair game to the cost-cutter, even if it eventually kills the company – as long as it happens in a future accounting period, of course.
Let’s apply some simple common sense and approach the problem from the Outside-In. It seems obvious to me that from the customers’ (the source of all cash flow, profits and job security) perspective, the company can take a huge axe to everything they do that doesn’t deliver customer value. They could then invest more in projects that customers do value and they want to buy in the future.
No matter how complicated the internal analysis on the spreadsheet, cutting big numbers without getting your customers to tell you whether it is a cost or an investment is no more professional than Russian Roulette.
“It was a pity thoughts always ran the easiest way, like water in old ditches.” – Walter de la Mare.
“Sacred cows make the best hamburger”- Mark Twain.