We all, at some point in time, sit down with our thoughts and worries and ask uncomfortable questions: what can we do without? Energy costs remain elevated. Financing costs have not returned to where they sat only a few years ago. Margins that once offered a comfortable buffer have narrowed, and the temptation to reach for the nearest lever, whether that be staff, rent, equipment, or the marketing budget, and subscriptions, has never been stronger.

I understand the instinct when cash is tight. Cash feels like the only thing that matters. But here is the truth that few owners are told at the moment they most need to hear it: not all costs are equal, and the wrong cut can cost you a great deal more than the expense it was meant to save.

I have written before about the folly of reducing price under pressure. Discounting is almost always the wrong first move, because it punches a hole in your margin that is difficult to repair, and it teaches your customers to wait for the next discount rather than pay for your value. The same principle applies, with even greater force, to the costs sitting on the other side of your ledger. Cutting the wrong cost does something worse than discounting ever could. It punches a hole in the very qualities that make your business worth acquiring in the first place.

Consider what a prospective buyer is actually paying for when they price a business today. It is not simply the revenue line, and it is rarely the assets sitting on the balance sheet. What commands a premium in the current market is resilience, the capacity to absorb a shock without the whole operation grinding to a halt. It is documented process, the knowledge that survives even when a key person does not turn up on Monday. And it is management depth, evidence that the business can run, and grow, without the owner standing over every decision.

Herein lies the trap. The very costs an owner is most tempted to cut under margin pressure, the marketing spend that builds pipeline, the systems that document how work actually gets done, the second and third tier of staff who carry knowledge beyond the owner’s own head, are frequently the same costs that build resilience, process, and depth. Cut them to protect this quarter’s cash position, and you may find you have quietly dismantled next year’s sale price.

Ask yourself a simple question before any cost is removed. Does this cut make the business more dependent on me, or less? A cut that increases your own indispensability may feel efficient today.

In valuation terms, it is a step in the wrong direction.

Every dollar of expense that exists to reduce risk, whether that risk is a single point of failure, an undocumented process, or a customer relationship that only you can manage, is a dollar working in favour of your eventual value. Remove it, and the saving on your profit and loss statement arrives at the direct expense of your enterprise value.

None of this is an argument against discipline. Waste should always be found and removed, and a tight margin is as good a reason as any to look hard at what a business genuinely needs. The distinction that matters is between cost reduction that removes waste and cost reduction that removes value. The first strengthens a business under pressure. The second merely defers the pain, and hands the difference to whoever eventually buys what remains.

It is worth noting the wider context here. The same elevated costs pressuring owners into these cuts are, for a patient buyer sitting on capital, precisely the conditions that create opportunity. Somebody, somewhere, is looking at businesses much like yours and waiting for the moment a good operation, weakened by short-term thinking, becomes available at a discount. Do not hand that buyer the discount yourself.

Before you cut, ask what you would be selling if you had to sell tomorrow. Would a buyer see a resilient operation with process and depth behind it, or a business quietly hollowed out to survive one more quarter? The answer to that question should guide the pencil, not the pressure of the moment.

For professional guidance on protecting the value of your business through a period of margin pressure, contact Kevin Lovewell directly on 1300 551 757.

~ Kevin Lovewell