Should You Raise the Ceiling or Lower the Floor?
Over the years, I’ve talked with many hundreds of small business owners whose companies were at varying stages of growth – and success.
One of the things that has struck me as I’ve thought about those conversations is the concept of “headroom.”
Essentially, a business has ‘made it’ when you can stand up inside the ‘room’ that you’ve created. Obviously, there are two different ways to create more headroom: you can raise the ceiling (revenues), or you can lower the floor (expenses). It’s a physical analogy, but one that I’ve found is really useful in both understanding what’s going on, and in figuring out what to do.
Many owners spend a lot of their time focused on controlling costs (lowering the floor). Some degree of this is healthy, especially when it comes to building a culture within your company that encourages thrift. It’s also the easiest thing to do when you hit a bump, generally, because expenses are something you can control. But it is exceedingly rare that cost control – in any size of business – paves a path to success. The best you can hope for is to buy time.
The place where the most successful business owners focus their energies is on raising the ceiling: growing revenues to the point where the business can stand up comfortably, and keeping it there. And, paradoxically, in many cases the path to a higher ceiling involves increasing expenses – for example, adding a new salesperson, upgrading equipment, or investing in marketing – so as to be able to attract more customers or increase sales to your existing customer base. (More about this in a later posting, but as the old saw goes, “You have to spend money to make money.”)
So if you find yourself in a situation where you’re feeling squeezed for headroom, ask yourself whether the cause is that the floor is too high or the ceiling is too low, and whether the ‘fix’ lies in digging down, or in raising the roof.
November 26th, 2007 at 12:14 pm
I like the analogies that you use in this article. Your thoughts are very applicable to most business owners who are looking to raise revenues and/or lowering costs to succeed. Check out my article on “Will your airplane fly” which touches on some of the other factors that make your ‘room bigger’. http://egoliblog.blogspot.com/2006_07_01_archive.html
December 3rd, 2007 at 1:52 pm
This is a great metaphor. I think that most bootstrappers (vs. VC backed) and small businesses tend to be risk averse, they have all of their eggs in one basket so they have to guard the basket. Given that, attacking an existing expense stream makes a lot of sense, it’s much more tangible than identifying and attempting to exploit an opportunity. I think for the most part the cost management and accounting tools are more mature, especially for small businesses, than marketing and opportunity identification tools. What’s the marketing equivalent to QuickBooks for a small business or a VSB (very small business less than 15 people, less than four million on revenue).
I think for the most part a lot of cost saving requires less change in behavior (obviously there are exceptions like the lean model, which requires a fundamental re-think, and some well constructed re-engineering efforts) and so requires less “social cost” inside the business to implement. The side effects from a cost savings effort typically take a while to discern, where the costs savings are normally immediate. Going after an opportunity will reliably raise expenses but may take a lot of fine tuning to see actual payoffs. So it’s the reverse.
Nice metaphor for a common situation.
Sean Murphy www.skmurphy.com