By: Nick Mungor, Partner at Novo Advisors
Featured in SFNet Midwest Quarterly Newsletter, Q3 2024 Issue


In today’s ever-changing business environment, managing costs is a critical component of maintaining profitability, especially when faced with stagnant, declining, or unpredictable revenues. Many companies have grown reliant on their existing cost structures and find themselves paralyzed when the time comes to reduce expenses or reimagine their business operations to support lower revenue levels. This challenge has become more pronounced in the wake of COVID-19, which has drastically altered revenue streams for many businesses — sometimes for the better, but now settling back to reality, or “old normal”.

Accurate revenue forecasting has always been tough to predict, but the pandemic has amplified this difficulty. Companies have experienced revenue changes due to factors such as shifts in consumer spending, industry-specific market softness, and significant changes in their workforce. The uncertainty makes it hard for businesses to decide when to pull the trigger on cost reductions. Many have grown into their new, larger structures, making it harder to scale back on technology, personnel, or operations.

Read below as we dive into the critical importance of cost management, especially during periods of decreasing revenues. We’ll explore the procedures companies should have in place for managing costs and strategies they can take when action is necessary.

Cost Structure Management

  1. Know Your Costs: Ensure your cost categorization is accurate and up-to-date. Understanding which costs are fixed, semi-fixed, and variable is crucial for effective cost management.
  2. Have a Contingency Plan: Develop a plan for operating at 25% less revenue. This plan should outline specific cost-cutting measures and strategies for maintaining operations during downturns.
  3. Establish Thresholds: As a management team, decide on a threshold for how long you will sustain decreased revenue before implementing your contingency plan. Stick to this decision to avoid prolonged financial strain.
  4. Timely Implementation: Understand how long it will take for your contingency plan to have a meaningful impact. Swift and decisive action can often prevent more significant problems down the line.

Nick Mungor, a partner at our firm, highlights a common situation he sees:

“Companies often struggle to grasp that if they were a $100 million revenue company but are now down 20%, they should not fixate on the decline. Instead, they should focus on the fact that they may now be an $80 million company, which they likely were a few years ago and operated well. By stepping away from the emotions and conducting a look-back exercise, they can identify what is needed to return to the efficient operations they had at $80 million. While some costs are harder to unravel, having a plan and taking action, even if disruptive initially, is almost always better than doing nothing.”

Adapting Your Cost Structure

To navigate through these revenue downturns, businesses should consider the following strategies:

  1. Operational Efficiency: Conduct a thorough review of all operational expenses. Identify areas where costs can be reduced without significantly impacting productivity. This might include renegotiating contracts with vendors, cutting down on nonessential travel or spending, and tightening controls on inventory management.
  2. Personnel Management: Keep a close eye on changes in personnel that may cause significant cost changes. Ensure that commissions align with the profitability growth of the business. Consistently addressing operational and personnel KPIs that drive the business is crucial in managing costs.
  3. Technology and Automation: Evaluate your technology stack to ensure you fully understand its value and necessity. Consider whether all platforms are essential and if investments in technology can streamline operations and reduce manual labor costs. Also, understand how your tech ecosystem interacts — trimming pieces can be challenging if they are now part of the fixed operating infrastructure.
  4. Critical Assessment of Add-Ons: Review the platforms and tools added in recent years. Determine if any can be cut without harming operations. Focus on what is truly necessary for the business to function efficiently.

Businesses must remain agile and proactive in managing their cost structures amid uncertain revenue forecasts. By understanding costs, having contingency plans, and making informed decisions, companies can navigate through revenue fluctuations and maintain financial health. At Novo, we are committed to helping businesses navigate these challenges. We offer strategic guidance and practical solutions to reconfigure cost structures in ways that support long-term sustainability.