By now, the painful ritual is all-too-familiar: You’re at ad close and pages are below budget once again. To preserve margins, you must cut costs. But how much and where?
At Briefings Media Group (BMG), we have had our share of disappointing ad closes in recent years. To better cope with these tough situations we developed a spreadsheet we call the Required Cost Reduction (RCR) Calculator. It provides a systematic process for identifying cost reductions, and it also focuses those cuts at the source. But above all, the RCR Calculator prompts us to deal with sales shortfalls as they happen.
We use the spreadsheet primarily for our controlled circulation magazines. But the RCR Calculator can be adapted to take subscription and newsstand revenue into account as well (just add a section for each to tally revenue and record expense reductions).
Step One: Calculating the Miss
The first section of the RCR Calculator tallies up the actual ad revenue by sales rep versus budget and the overall variance to budget. At our company, the vice president of finance starts the process at ad close by entering the actual and budgeted sales by rep into the spreadsheet.
Two judgment calls need to be made here: First, how much of a miss versus budget triggers the RCR process? At BMG, the revenue must be at least 10 percent below budget before we start the wheels turning. It may also be prudent to set a dollar threshold that triggers the RCR process regardless of the percentage of the revenue shortfall.
Second, how much of the revenue miss should you attempt to recover through cost cuts? Does it ever make sense to cut a dollar in costs for every revenue dollar missed? If a magazine is generally healthy and the under-budget issue is unusual, your management team might decide to only cut 50 cents of cost for every dollar in revenue missed.
Step Two: Commission Savings
The next section of the RCR Calculator tallies up the budgeted commission dollars that will not be paid because ad sales fell short of budget. At BMG, the vice president of finance computes this section based on the compensation plans for the sales reps.
The RCR spreadsheet has two lines, one for calculating commission savings based on sales shortfall, the other for calculating savings from a rate reduction—that is, a reduction in the commission rate.
If your commission plan requires reps to reach a minimum sales figure to receive any commission at all, and they fall short, this calculation is simple: Commissions would have been 3 percent of sales, and the minimums weren’t achieved, so the entire budgeted amount is saved (3 percent of $50,000, or $1,500).
Some ad sales commission plans have tiered commissions, so the lost commission calculation is more complex. Suppose the issue budget was $50,000 and the commission tiers were 1 percent for reaching 80 percent, 2 percent for hitting 90 percent, and 3 percent for hitting or exceeding budget. If the sales staff reached 80 percent, they earned 1 percent on $40,000, or $400. That means the lost commissions for the issue were $1,100, the budgeted commissions of $1,500 minus the $400 actually earned.
Step Three: Hunting for Savings
At BMG, the publisher has overall responsibility for the P&L of each magazine, so it is up to him or her to complete the RCR process. That involves finding cost reductions in each cost center to reach the required savings.
Prior to ad closing, our production department adjusts the issue’s page count to make it as efficient as possible, in consultation with me in my role as executive vice president and with the vice president of finance. Once the issue ships, production calculates what the printing and paper costs will be for the issue. The difference between the actual and the budget is entered in the RCR spreadsheet by the publisher with a notation, such as, “Reduced page count by 8.” We also estimate whether there will be savings on postage because of a smaller-than-planned page count or a higher percentage of editorial pages or both.
Step Four: Savings in Other Departments
The next stop is the publisher’s own budget for selling expenses. Can sales trips be cancelled? If so, the publisher lists those cuts and the budget savings that will result.
Next, the publisher consults the editor to determine whether the smaller issue resulted in lower editorial costs. They also decide what future editorial expenses can be cut—perhaps a reduction in freelance expenses.
The publisher then goes to the marketing director in search of reductions such as tradeshow expenses.
Finally, the publisher consults the circulation director. In the case of BMG, we develop circulation plans to hit goals such as the percentage of one-year requesters on our audited circulation statement. Money can be saved by reducing the amount of telemarketing to generate requesters and resorting to more e-mail promotions, for instance.
Step Five: Final Reckoning
Once the publisher has consulted all the departments to get savings commitments, he or she returns the completed RCR spreadsheet to the vice president of finance. The finance department makes note of the cost reduction commitments and tracks spending in future months to confirm that those commitments are kept. Finally, at our monthly Executive Committee meeting, we review the RCR spreadsheets for issues published the previous month to ensure that the process is working and we are getting the savings we need.
How Much Flexibility?
Publishers at BMG sometimes ask whether they can avoid cost cuts by applying revenue over budget in future issues. We typically give the publisher the opportunity to ask that certain expense cuts be restored, and finance keeps track of those decisions. We don’t let publishers use the revenue above budget for a future issue to cover the RCR for a previous issue.
Above all, the RCR Calculator takes the drama out of a difficult situation. It is a cold, hard truth that revenue shortfalls force publishers to take action to correct problems and ensure survival. We find that using this method cuts down on the madness.
Frank Finn is executive vice president & COO of Briefings Media Group, LLC, a b-to-b publishing and training company in Richmond, Virginia. To request a copy of the RCR Calculator, contact him at firstname.lastname@example.org.