Businesses preparing for an economic recovery will face challenges in the years ahead. When the economy slows and recessions hit, strategic cost-cutting is critical for business survival and its growth.
I wrote this article for my clients to help them during this difficult time to give a toolkit to approach the challenging time ahead, to help business leaders keep their companies alive, and to prepare them for better times beyond the recession.
The recent business, economic, social, and public health challenges have been significant. There has been widespread disruption of the economy and businesses — as well as massive job losses. And the economic and business road to recovery may not be a quick and easy one. The biggest challenges for businesses in a recession are to keep the cash flowing, remain profitable, and hold on to as many resources as possible to ensure upside during and after the economy recovers. It’s about staying in the game long enough to see the benefits of economic recovery and expansion.
The importance of strategic cost-cutting—
It’s not just enough to plan to cut costs when the going gets tough. Cuts have to be strategic—they need to be deliberate, intentional, and effective.
Every time costs are cut, there may be consequences. Cuts could adversely affect vendor relationships, staff morale, future competitiveness, and future readiness for recovery. In short, the best strategy when looking at cost-cutting, is to make sure that the juice is always worth the squeeze. Because each cut will come at a cost. And it’s important that cuts aren’t so deep that a company can’t recover from them.
Companies only go out of business for one reason: They run out of money. During a recession or other economic or business slowdown, sales often fall. Sometimes sales stall altogether, as they did for many companies during the lockdown period. Since increasing sales is tough—but cash flow and profitability are critical—business leaders will often turn their focus on cost cutting, as the only other way to support profitability. The trick is to keep the money flowing. Cash flow is life of a business.
THE METHODE- CONDUCT A SPEND ANAYLYSIS
Breaking down expenses and putting spend in the right categories are critical to ensuring the highest probability of successfully identifying cost-cutting opportunities.
When trying to cut costs, you begin with spend analysis. And in a spend analysis you should check: Where do I find the excess spend that I can cut to boost profitability?
Where do I find the most complete collection of accounting, purchase order, operating expenses, maintenance expenses, and administrative expense data available for my company? I will outlines the steps involved in conducting Spend Analysis in the following part of the article.
STEP ONE – Collect Data:
Only after asking the more specific question as above you really move on to beginning to collect the data. As you begin the next step to collect data, you need to think about where your data is coming from. When you are using internal data, you need to make sure that the data is appropriate. If the company data you find doesn’t answer the question, then you will need to keep on digging. During the data collection, you need to watch out for inconsistencies in the data. It should be is appropriate, reliable, and trustworthy. After all, if the data sets don’t match up and you do analyses, the implications could be misleading and worthless.
One of the most important parts of data collection is often interviews of key personnel. This may include the executive team, the finance team, procurement, human resources, and other leaders. Often these interviews provide you with information on where to find data for your analysis—and they provide you with context and content that you might otherwise miss.
STEP TWO – Breaking Down Costs
It is best to break down costs into as many subcategories as possible.
Example 1: Employee costs:
—Salaries for employees
—Overtime wages for employees
—Part-time wages for employees
— wages for contractors
—Other labor costs
Example 2 : Equipment Costs:
STEP THREE : PRIORITIZING SPEND CATEGORIES
Now you will need to prioritize your spend categories to identify which buckets of expenses are part of the core business (ie essential)—and which categories of spend are nonessential.
The first place to look at spend is in nonessential spending. If your top areas of spend are not related to your core business then you should go for deeper analysis. In a service business, some overhead expenses—like fancy offices or company cars—may be completely unnecessary.
It is very common for companies to own more equipment than they need. But the value of these expenses should be evaluated if there is less revenue, less business, and generally less work that needs to be done—all of which is common in a slowdown.
There are some areas where cutting costs is much more difficult. Some of the most common sensitive topics include:
—Raw Inputs for production
My advice is to leave off-limits topics alone and Instead, just focus on the areas where cost-cutting is allowed.
STEP FOUR – BENCHMARKING COSTS
It’s also important to see the comparative levels of spending of your company against the costs in certain categories across your entire industry. This kind of comparative analysis in industry standards can be made for any number of categories, including overall operating expenses, capital expenses, fixed costs, marginal costs, labor costs (including overtime), etc. The goal is to have some of the lowest costs in an industry.
STEP FIVE -PRIORITIZING and NEGOTIATING WITH VENDORS
Before negotiating and cutting costs, it’s important to prioritize your vendors. Cost should be a consideration. But so should quality and reliability. In short, you are looking for vendor value—not just the lowest-cost vendors.
Vendor Scorecards One way to evaluate vendors and rank them in a number of ways.
Scorecard Criteria Some of the criteria often included on a vendor scorecard include the following: —Vendor Importance
—Vendor Payment Terms
STEP SIX : REDUCING PHYSICAL OVERHEAD
One critical way to reduce company costs is to reduce unnecessary overhead. This includes reducing office space, inventory space, warehouse space, retail space, and any other square footage that is not absolutely necessary for your business.
Being judicious in overhead can greatly improve company profitability. After all, every rupees in spending that gets cut goes right to the bottom line. This means that cutting costs can actually boost profit more than increasing sales.
STEP SEVEN – IDENTIFY ASSETS
Here we identify our asset that can be reduce, reuse, and recycle. It is a hunt for hidden value in assets a company owns and may not be fully optimizing.
First, some of the goods may not be in use. This would make it possible to repurpose the goods so they could be used. The best strategy here would be to use them or sell them.
Second, some goods might be needed, but they do not work. These could be repaired or sold. Or if they are in really bad shape, they could potentially just be recycled.
Third, some goods might not be in use and not working—but they may be rented. In this case, the company is paying for a rental agreement on broken equipment. That’s a big waste! Reviewing the rental agreement is critical. And exiting the rental contract may likely make the most sense.
Fourth, some goods might be not in use, not working, rented, and with a maintenance or service agreement. That’s an even bigger waste. The rental, maintenance, and service agreements should all be reviewed—and potentially exited in part or in total.
Fifth, some goods may be not in use, not working, owned, and with a maintenance or service agreement. As in the case of rentals, the maintenance and service agreements for this owned equipment should be reviewed and very potentially exited.
Sixth, some goods may be not in use, not working, owned with a maintenance or service agreement, and paying for insurance on them. These costs should all be reevaluated, and agreements should be reviewed and potentially exited. Once excess equipment is disposed of, insurance agreement terms should be renegotiated.
As with physical assets, excess inventory, inventory that is no longer useful, and inventory that no longer has value can all be considered for selling out.
STEP EIGHT – SELLING ASSETS
In truth, there are many reasons to get rid of assets. Let’s look at a few key reasons you might want to get rid of an asset
Unprofitable: It is an unprofitable asset or part of your business.
Low ROI: The asset or part of your business has a lower rate of return or lower ROI than other parts of your business.
Expensive: It is an unnecessary asset or part of your business. Risky: It is too risky an asset or part of your business.
Distraction: The asset or part of your business detracts from your core competencies.
Unnecessary: It is an unnecessary asset or part of your business.
Useless: It is a useless asset or part of your business.
Unenjoyable: You don’t like the asset or part of your business.
STEP NINE – MAKING CUTS
With all the information at your hand now, you can initiate cost cutting process. The idea is you do not run out of money and to make sure your company doesn’t die.
CUTS TO AVOID
As you consider potential costs to cut, it’s important to make sure that you don’t cut anything essential that could hurt your company during a recovery phase. For each business, there will be some cuts that are essential to avoid.
At the top of this list are audit expenses, accounting expenses, and software that makes the accounting, bookkeeping, audit, and financial operations of your company functional.
It’s also important to try and keep from cutting any core workers until the very end. After all, without them, it might be impossible to restart your business.
The big idea in writing this article was to share actionable strategies to help you improve the profitability of your company by strategically approaching the problem of costs and profitability during an economic downturn. Hopefully, the analytical frameworks and actionable strategies and tactics I have laid out in this article will help you get there.
Your Next Steps The most important thing is to try and keep yourself and your loved ones out of harm’s way. But the second most important thing is to keep your company out of harm’s way—and cut costs! Recovery will come. And if you look for opportunities to help your organization improve in the wake of this tragedy, you may be able to hasten the speed recovery.
Good luck and be well!
AUTHOR: Mohammed Nizam (CEO & PRINCIPAL CONSULTANT– MISSION MEANS CONSULTING (www.missionmeans.com)