Rick Thomas: Principal, Thomas Business Consulting Inc.
When customers are scarce and you’re having a hard time paying bills, you need to start hoarding your cash. There are many ways to reduce the amount of money flowing out of your business.Here are some of the main areas to look to:
- discretionary spending (non-essential maintenance and employees);
- Rent (landlords are more willing to renegotiate);
- Capital costs (put off that equipment purchase); and
- Payroll (you might not need to lay anyone off – instead, temporarily reduce salaries and hours).
In my experience, simply reducing wages is not the answer – look instead to increase productivity. I’ve seen a 10% reduction in wages cause a 20% reduction in productivity. But when productivity measures are brought in, along with cost reduction, I have seen as much as a 50% increase in productivity.
For a business to prosper, the net income should be more than the total expenses. The first place to look is your “direct” costs – expenses that relate directly to your business and contribute to your bottom line. The other is overhead costs. These expenses – like rent, gas, electricity and wages – are necessary for making your business work but aren’t directly connected to the product or service you are offering.
The problem with overhead costs is that they often come up unexpectedly. You can add a seemingly minor cost like food, and before you know it you’re swamped with expenses. Most businesses try to bring down their overhead cost by reducing expenses on energy, telecoms and office supplies and by encouraging their employees to get involved in cost-cutting measures.
If the company can’t do it on their own, expense reduction analysts can be called in. They examine a company’s books thoroughly and identify undiscovered cost savings in expense categories in every possible department. Their goal is to make the company more financially efficient.
Sandy Huang: President, Pinpoint Tactics Business Consulting
Companies typically cut costs to improve efficiency or save money in a challenging business environment. But cost cutting isn’t just a decision executed according to black-and-white criteria; it’s an art form, the success of which depends on many factors.
Three elements to keep in mind:
Ensuring business continuity: All businesses, no matter the size, have management, mainline and support functions. Management functions provide company oversight, mainline functions support the delivery of product/service, and support functions improve the performance of mainline functions. Decision-makers must understand each cost-cutting item’s role within the organization and ensure that potential cuts will not have a negative effect on company integrity or its ability to provide service to customers. Cost cutting should never be a knee-jerk decision.
Seeing the forest for the trees: It can be tempting to cut initiatives that only return long-term results. These initiatives are often strategic and take time to nurture but are vital to achieving big-picture goals. Companies that fail to plan for the long term may become directionless or even implode after experiencing a period of unexpected growth that they couldn’t manage. In tough economic times, an in-depth understanding of company goals provides the insight to “see the forest for the trees,” drastically reducing the danger of making decisions that will be detrimental over the long term.
Boosting staff morale: Cutting costs sometimes means letting go of things or people who have been integral to an organization’s development. Employees are arguably a company’s most valuable asset, and cultivating a trust culture through effective internal communication is paramount. When experiencing loss or change, staff must be kept informed and encouraged to engage in the process. A supported, happy team is often the difference between a smooth company transition and a disaster.
Mark Wardell: President and founder, Wardell Professional Development
There are hundreds of ways to save money in any business. The trick is to think of all your costs as investments and carefully consider the return on each investment. These can include operating expenses as well as company assets.
Here are four examples our business advisory firm has seen work well in recent years.
Renegotiate with existing suppliers: Business owners are frequently amazed how much can be saved simply by asking for a better price. Suppliers often increase prices every year, but this doesn’t mean you need to accept these increases at face value. Shop around if you have to. You’ll find almost everything is negotiable if you ask.
Convert assets into operating expenses: Many companies could save significant long-term costs by selling their machinery or vehicles and leasing them instead. Costs are reduced because the company no longer needs to spend money on upkeep (the business leasing the assets usually takes care of this) plus, you can usually get new models before they begin giving you trouble due to wear.
Sell or rent unused assets: If a company has assets it rarely uses, it often makes sense to sell them or rent them out, rather than have them sitting and collecting dust. We recently ran into a company with $4 million worth of inventory that had never moved. The inventory was sold, and the recovered warehouse space was rented out.
Outsource non-core work: Another strategy is for a company to outsource work that’s not part of its core competencies to suitable specialists. For instance, a sales and marketing company might find it cost effective to outsource distribution and warehousing, allowing it to focus on what it does best: marketing its products. This concept works equally well across all departments, from production to payroll.
