Cost Control in a Growth Business
How much business can we expect in this new company if we are successful? And how much front-end investment is then justified?
To grow a business one has to put in front-end money. That money is in- vested in tomorrow’s profit makers, so those front-end investments will
only be costs and no returns, and sometimes for a long time. How does one manage those to maintain cost control? The first thing is to budget these ac- tivities separately. I call it the opportunities budget. The second rule, there- fore, is to think through what results we expect from these investments in the future and within what time period.
The best example I know is how Citibank became the world’s only suc- cessful transnational bank in the heady 1970s and 1980s. The reason was that Citi first thought through how much front-end investment in a new branch could be justified. It thought through what the minimum results in the new territory could and should be. Citibank asked: “How much busi- ness can we expect in this new country if we are successful and become a market leader? And how much front-end investment is then justified as- suming that the front-end investment must not exceed a certain percentage of the potential results?” And then Citi knew from its own experience how long it should take before this new branch should reach break-even, that is, before it should begin to produce profits.
To grow a business one has to put in front-end money. That money is in- vested in tomorrow’s profit makers, so those front-end investments will
only be costs and no returns, and sometimes for a long time. How does one manage those to maintain cost control? The first thing is to budget these ac- tivities separately. I call it the opportunities budget. The second rule, there- fore, is to think through what results we expect from these investments in the future and within what time period.
The best example I know is how Citibank became the world’s only suc- cessful transnational bank in the heady 1970s and 1980s. The reason was that Citi first thought through how much front-end investment in a new branch could be justified. It thought through what the minimum results in the new territory could and should be. Citibank asked: “How much busi- ness can we expect in this new country if we are successful and become a market leader? And how much front-end investment is then justified as- suming that the front-end investment must not exceed a certain percentage of the potential results?” And then Citi knew from its own experience how long it should take before this new branch should reach break-even, that is, before it should begin to produce profits.
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