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Cost vs. Productivity

Financial expert Henry Ong explains.
By Henry Ong |

Q: I just came back from the States, to help run the family business (a furniture-making company based in Pampanga). I noticed that some of our old-time supervisors have salaries that are above industry standards, and honestly, I feel that they are overpaid. Our business is doing well, but I want to cut costs where I can. Would it be a good idea to cut their salaries or even retire them?

[related|post]A: Cutting cost is a good idea because it increases your profit, but to cut cost for the sake of saving money may not be necessarily good because there are critical expenses that you need to incur to keep your business growing.

If you want to reduce your costs, you must plan and manage it well by right timing and properly identifying the expense you want to cut. This way, you can anticipate any risk or negative consequences that could affect your overall profitability.

When you draw up your-cost cutting measures, you manage the risks by understanding the nature of your expenses. There are expenses that you can simply shoot down because of their obvious futility to your business growth. However, there are expenses that may look irregular and yet are vital to your business success. These are what you should carefully examine and analyze because these may have long-term effects on your business.

Let us assume that you retired all your old-time supervisors because you find them overpaid and replaced them with younger supervisors with lower salaries. While this move may give you substantial savings from payroll, this may not necessarily lead to greater profits. The new supervisors that you put into the company may not have enough experience on how to run your operations or handle your employees and clients. This could eventually lead to inefficiency losses.

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What if the new recruits were competent and capable? Yes, this is possible, but there is no guarantee that they would stay with you for long. Since they are younger and command cheaper salaries, they will always be on the lookout for greener pastures. If this happens, you will have frequent turnover of managers, and this could affect your long-term business sustainability. Of course, it is also possible that your decision to replace your overpaid, old supervisors may be right, but the risks of failure might be greater.


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