Cut costs or grow revenue: which should come first?

Key takeaways

Whether to cut costs or grow revenue depends on your margin and your spare capacity. A pound of cost saved is a full pound of profit, while a pound of revenue is worth only your margin. At a 10% net margin, £10,000 saved equals £100,000 of new sales. But cost reduction has a floor, and revenue does not.

• £1 of cost saved adds £1 of profit.
• At a 10% margin, £10,000 saved equals £100,000 of sales.
• Cut first when capacity is wasted, grow first when it is full.
• Never cut the costs that produce the revenue.

Why is a pound saved worth more than a pound sold?

A pound saved is worth more because it reaches profit whole. A pound of revenue first pays for the product, the people who deliver it and the overheads, and only the remainder is profit. The lower your margin, the more sales it takes to match a saving.

In an illustrative business with a 10% net margin, removing £10,000 of wasted cost adds the same profit as winning £100,000 of new sales. At a 20% margin the equivalent is £50,000.

• How BPO can help businesses reduce operational costs
• Operating expense ratio: how to calculate and read yours

When should cost reduction come first?

Cost reduction should come first when the business has waste it can see: under-used roles, repeated work, senior people on routine tasks, or operating costs growing faster than sales. It should also come first when cash is tight, because savings arrive faster and more certainly than new customers.

• Operating costs rising faster than revenue.
• Routine work done by expensive people.
• Frequent rework and correction.
• Cash under pressure this quarter.

• The cost lever scorecard: find savings process by process
• How to run a cost review in a small business

When should revenue growth come first?

Revenue growth should come first when the operation is already lean, margins are healthy and demand is the constraint. Cutting in that position weakens the very thing that could grow. It also comes first when a fixed cost base is under-used: filling spare capacity with sales lowers cost per unit without any cuts.

• Operating leverage: why fixed costs make growth risky
• Unit economics: does each new customer still make money?

Can you do both at once?

You can do both when the saving comes from routine work and the growth comes from the people it frees. Moving 20 hours a week of admin off a salesperson lowers the cost of that admin and returns 20 hours of selling time. This is the strongest case for a managed team: one change that helps both lines.

Across our client work, owners have got 31 hours a week back. What those hours are spent on decides whether the result is only a saving or also growth.

• What to do with cost savings: reinvest, keep or pass on?
• How outsourcing helps small businesses scale without hiring

Which costs should never be cut to save money?

Do not cut the costs that produce or protect revenue: response speed to enquiries, the quality customers pay for, and the people who hold key relationships. Savings there show up as lost sales a quarter later, where they are harder to trace back to the decision.

• Cost-cutting mistakes that end up costing a business more
• How to cut costs without hurting customer service
• Slow response to enquiries: what it costs and the fix

What does this look like in practice?

A pattern we see in owner-led firms: the plan for the year is to grow sales by a fifth, and the owner is the best salesperson. The owner is also spending two days a week on quoting, invoicing and chasing. No growth plan works until that time is released, and releasing it also happens to lower the cost of the admin.

• See client work
• BPO Solutions for UK businesses

Decision checklist

Answer these before setting next year's priorities.

• What is your net margin?
• How much revenue equals a £10,000 saving at that margin?
• Is the team at capacity or under-used?
• Are operating costs growing faster than sales?
• Which costs directly produce revenue?
• Which people could sell or deliver more if freed from admin?

• How to set cost reduction targets your team can hit
• Cost cutting vs cost optimisation: which protects profit?

Next step

Send us your margin, your headcount and where the owner's week goes. We will tell you which lever is likely to move profit faster and what it would take.