Too much thrift can lead to mistakes

Spending money is an art, full of knowledge, for personal life, but also for business. It is true that managers should go beyond the “one acre, three divisions” and pay attention to the fundamental interests and values of the company in order to make correct decisions. So, how to judge the necessity of saving in business operation? How should companies spend money in moderation?
Blindly reduce costs

The purpose of business is to create value, not to reduce costs. Companies may lose more than they gain by saving money in the wrong places.
In July 2021, the novel coronavirus, which had been silent in China for a long time, broke out again from Nanjing Airport and spread all the way to Yangzhou, Zhengzhou, Zhangjiajie and other places. The pressure of prevention and control across the country suddenly increased dramatically. Epidemiological investigation found that the outbreak of Nanjing Airport was caused by the change of cleaning and cargo flow of Lukou International Airport, which outsourced property cleaning and unified mixed operation of domestic and foreign flights. The decision to make this change was made by the chairman of The Eastern Airport Group, whose intention was to improve operational efficiency and reduce costs. This is an example of the dire consequences of corporate money-saving.
Another example of saving more money than you lose is the case of Lao Gan Ma. In 2018, word got out that Laoganma had changed the sauce after its founder, Tao Huabi, stepped back from day-to-day operations, replacing the original Guizhou chili with cheaper Henan chili. According to a dealer, the price of guizhou pepper is basically maintained at 12? 13 yuan/jin, henan pepper is 7 yuan/jin, and Lao Gan Ma uses 13,000 tons of pepper a year. In order to save costs, Laoganma began to slowly reduce guizhou pepper and increase the amount of chili from other places after gaining popularity, until 2011, guizhou pepper was completely eliminated.
Although consumers in the beginning to eat not out, but after learning the inside story, disappointed. It can be seen that the damage to the brand of Lao Gan Ma caused by the pepper replacement incident is probably far more than the cost saved. Blindly reducing costs is likely to fall into similar nanjing airport and Laoganma predicament.
Cost of different nature

Saving money may not pay off because of the different nature of costs and expenses.
Broadly speaking, costs can be divided into two categories: value creation and consumption. For value creation expenses, no money means no work, typical examples are equipment maintenance and channel development. The costs of consumption must be greatly reduced, and experience has proved that there is always room for such reductions. Costs are like fingernails. They need to be clipped from time to time, but they can be painful if they go too far.
The expenses that the market pays the most attention to are research and development and marketing, because these two kinds of expenses represent the future growth potential of the enterprise to a considerable extent. R&d and marketing expenses generally do little to help revenue in the current period; their impact is mainly in the future. It is conceivable that a management focused only on current performance would not want to spend a lot of money on these two projects. Moreover, the future benefits brought by these two expenses are highly uncertain and are high-risk investments. Take the return on R&D investment as an example. In 2008, someone ranked the proportion of R&D investment in sales revenue of the world famous multinational companies, and Nokia ranked eighth and Apple 80th. A separate list that same year ranked Apple first in innovation and Nokia poorly. Therefore, r&d investment does not ensure the establishment of innovation capacity.

‘Management is an iron hand in a velvet glove’? Its connotation should be “system and culture”, namely, “visible hand” and “invisible hand” in management, “visible hand” is institutional system, “invisible hand” is cultural system including values.

Costs are like fingernails. They need to be clipped from time to time, but they can be painful if they go too far.

Of course, there is a difference in cultural temperament between a company that focuses on research and development and one that likes to spend heavily on marketing. A typical example is the Sixth Harbin Pharmaceutical Factory, which is heavily advertised but rarely invested in research and development. As a result, the company has only one product, only calcium tablets and vitamins.
If marketing and r&d costs are the “good” costs that bring future growth, then the “bad” costs that hinder the development of enterprises include forfeiture costs, inventory costs, redundant costs, hidden costs and so on.
Forfeiture is the most typical bad charge. Not to mention the consumption of resources, but also a negative impact on the company’s image.
In addition, excessive procurement, excessive production of inventory costs will also cause great harm to enterprises. On the surface, this may seem like cost savings, but subsequent losses from inventory overhang are almost invariably painful. However, many people in the enterprise want to over-purchase for the benefit of the department, so the procurement department will reduce the unit purchase cost and the performance will be significantly improved. Production departments also welcome overpurchasing, which can reduce production costs and boost performance. Even the sales department will approve of this because selling prices are likely to fall as costs fall and sales targets are easy to meet. The cost of improving the performance of the department is the loss of the overall interests of the company, which is worth vigilance.
The direct impact on cost is limited, but the enterprise culture and morale of the great damage to the cost of redundant staff. A place full of redundant staff must be full of complaints. Overstaffed enterprises often make the original active work difficult to feel at ease, over time the enterprise morale is low, however, as the overstaffed can also settle down in the enterprise, either in the past, or the background is excellent, the average person is helpless.
The expenses with the greatest potential impact are those that are hidden, such as the cost of inventory capital. Imagine that two products were completed and shipped into storage for the same unit cost and sold for the same unit price, but one was sold the day it was shipped in storage and the other was sold three months later. From the financial statement data, the sales profit of the two products is exactly the same. But common sense tells us that every day that the second product sits in the warehouse is a drain on the company’s precious capital, which is very expensive. The performance of many companies has not improved, one of the reasons is that the inexplicable occupation of all kinds of assets drag down the efficiency of the use of assets, thus pulling down the profit margin of assets. In this sense, reducing occupancy is creating value.
The purpose of a business is to make money, but what management does every day is spend money. The purpose of a company is to make money, but what the management is doing every day is to spend money. Spending money is the foreshadowing of making money, making money is the result of spending money. Spending the same money can make all the difference. In this sense, spending money is an art, and spending money is learned.
To spend money effectively and correctly, managers need to abandon the thinking of working for a company and set up the thinking of a boss. When making decisions, the priority is to consider the KPI of oneself or the department and the performance of oneself or the department. The boss thinks about the value of the company, the foundation of the company. When managers encounter problems, they should try their best to think and make decisions from the fundamental interests of the company and the value creation of the company. Not so is not enough to improve their own pattern and realm, the cost control as such view, managers can not ignore.

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