Cost Control in a Stable Business
In cost control an ounce of prevention is worth a pound of cure.
All of us have learned that it is much harder to get rid of five extra pounds than it is not to put them on in the first place. In no other area
is it as true as it is in cost control that an ounce of prevention is worth a pound of cure. An absolute necessity is to watch like a hawk to make sure that costs do not go up as fast as revenues; and, conversely, that they fall at least as fast as revenues if there is a recession and revenues go down.
One example of a follower of this rule is one of the world’s largest phar- maceutical companies, a company that grew almost eightfold, adjusted for inflation, between 1965 and 1995. During those thirty years, it held cost in- creases to a fixed percentage of its increase in revenues; a maximum 6 per- cent rise in costs for every 10 percent rise in revenues. After five or six years of trying, it also learned how to make sure that costs go down in the same proportion as revenues go down in a down period. It took quite a few years to make this work; now it’s almost second nature in that company.
All of us have learned that it is much harder to get rid of five extra pounds than it is not to put them on in the first place. In no other area
is it as true as it is in cost control that an ounce of prevention is worth a pound of cure. An absolute necessity is to watch like a hawk to make sure that costs do not go up as fast as revenues; and, conversely, that they fall at least as fast as revenues if there is a recession and revenues go down.
One example of a follower of this rule is one of the world’s largest phar- maceutical companies, a company that grew almost eightfold, adjusted for inflation, between 1965 and 1995. During those thirty years, it held cost in- creases to a fixed percentage of its increase in revenues; a maximum 6 per- cent rise in costs for every 10 percent rise in revenues. After five or six years of trying, it also learned how to make sure that costs go down in the same proportion as revenues go down in a down period. It took quite a few years to make this work; now it’s almost second nature in that company.
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