A cafe owner, famous for his soup, was told by his accountant that he could boost his profit significantly if he would add just 5 percent more water to the recipe. The accountant was right. The water was added and no one noticed. Months later, the cafe added 5 percent more water and still no one noticed. Later, more water was added. And then a little more, but never more than 5 percent because they had now "proven" that customers cannot detect just 5 percent more added water.
As you suspected, the cafe owner didn't lose his customers incrementally, but all at once. "The soup here just isn't as good as it used to be."
I was told that story by a multimillionaire Wall Street speculator. He says American businesspeople have a peculiar blind spot to the all-at-once backlash that comes from watering the soup. He said American businesses expect to see incremental declines when they are incrementally abusive, but that's never how it works. When the wife packs up to leave, she takes the kids and leaves all at once.
The central belief of a cost-cutter is that profits rise when costs are lowered. And on paper, this argument is insurmountable because the cost-cutter's forecast doesn't project a decline in business.
In the short term, the cost-cutter looks like a genius.
Later, when customers quit buying soup and the business begins to circle the drain, the silly little cost-cutter becomes an even taller hero:
"See how smart I am? If I hadn't reduced expenses, we'd really be in trouble right now. But with our new, lower overhead, we're still profitable. I've saved the company."
Don't laugh. I'm watching it happen to a friend's business right now and it makes me want to cry.
Shortly after we bought the plateau on which Wizard Academy proudly sits, the Chicago Tribune ran a fascinating story. These are the opening lines:
Fred Turner did not need to look at financial statements to know McDonald's was in trouble. He could taste it.
The man who worked alongside founder Ray Kroc to turn McDonald's Corp. into a global colossus, Turner noticed when penny pinchers at corporate headquarters changed recipes to cut costs. So when McDonald's cheapened the famed "special sauce" on its flagship Big Mac sandwich, Turner knew.
But it wasn't until a new CEO brought him back from retirement 18 months ago to help lead a turnaround at McDonald's that the now 71-year-old Turner learned just how deep the trouble ran...
McDonald's was a magical corporation when it was in the hands of entrepreneurs. But then the conniving little accountants took over.
I did not say that all accountants are idiots. My own accountant, Adrian Van Zelfden famously says, "It's usually easier to increase revenues than to cut costs. Don't try to shrink your way to profits."
Jean Backus, another CPA, was recently elected to serve as Chairman of the Board at Wizard Academy. Jean doesn't believe in shrinking things either. Jean believes in growing them.
Your accountant may be one of the good ones, too. What are they telling you to do? Are they suggesting that you grow your company? Or are they suggesting that you shrivel into something else?
A cost-cutter buys grapes and makes raisins.
An entrepreneur buys grapes and makes wine.
You'll never see a person arrive to a celebration
carrying a box of raisins.
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