Take it to the bank — an organization that has more expenses than revenues won’t survive indefinitely. Eventually, cash will run out, because there are practical limits on reserves and borrowing.
When expenses exceed revenues, it’s worth considering the relative simplicity of the problem. Since there are only two inputs — revenues and expenses — a solution must focus on one or the other, or both.
Often, philosophical sides will form to fix the problem —
- “We need to cut expenses to balance the budget!”
- “We’ve already cut expenses! The problem is revenue; we just need to raise revenue!”
The timing behind these philosophies is often the “devil in the details” that will determine management’s success.
Expense cutting is relatively easy. It just requires (1) a decision (albeit a difficult one) and (2) action.
Raising revenues is much more difficult. After a decision, and strategic actions, revenues may not increase as desired. This is actually a very common result, and I‘ve seen many an organization pursue the revenue route for years without success. This can dig a deeper hole, or worse.
One common strategy for raising revenues involves additional investment. “You’ve got to spend money to make money,” someone will say. The words make me cringe, because those who say this are usually talking about spending someone else’s money rather than their own.
I appreciate the value of investment, and I don’t discount it. However, this trite phrase is typically trotted out to justify an imprudent expenditure.
If your organization has deeply rooted structural issues, like insufficient or poorly-trained staff, these problems should be targeted to fix over time. But you don’t throw more expenses at a deficit. It will only accelerate the decline.
“Revenue diversification” and “social enterprise” are popular buzzwords to solve deficits.I support both in the right circumstances, but neither is a magic bullet. Raising prices, which seems unpalatable, is usually a more practical short-term solution.
When we think of cutting expenses, it undoubtedly includes the level of staffing, which is the largest expense for most organizations. It’s easy to justify that everyone is already overworked and that it’s not practical to reduce staffing. On the other hand, this notion that the level of business activity should define the level of staffing can be self-defeating. A more effective approach is that revenue should dictate staffing. This may require refocusing on high-return activities, cutting out some low-return activities, and perhaps even doing less, overall.
In the end, a combination of cutting expenses and raising revenues is often the best strategy to counter a deficit. My advice for managers — buck up. Don’t spin your wheels by avoiding the difficult decisions. Take short-term expense-reducing actions while also taking long-term revenue-increasing actions. Doing both will give you the best chance of improving your financial position.
Do you see this issue in a different light? Please share your thoughts.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFO’s serving nonprofits and for-profit businesses. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.