When things go pear shaped and our backs are to the proverbial wall our first thought is to slash costs. We are busy fighting fires so there is little time to think. Debtors and banks are chasing us and we need answers quickly. We are understandably afraid of losing what we have spent years building, so we look for a quick fix to give us back a sense of control.
Sadly, whilst this is the time when cost cutting is most needed, it is also the time when you are most likely to make bad decisions that may ultimately harm your business. We provide you with a list of things to consider before you act hastily. A small amount of time investing in thinking things through can prevent years of regret.
BEFORE YOU CUT:
Understand Your Expenses
Make sure you understand where your expenses are coming from. Consider asking for all invoices to be brought to you for a period of time and start asking questions. Why are we buying this? Why are we using that supplier? When was the last time we had a look at competitive prices?
If you personally don’t have time then ask your accountant or someone you trust to help you.
Do a Cost Benefit Analysis
You probably do some sort of cost benefit analysis before you decide to spend money, even if it’s an informal calculation done in your head. You need to do the same before you cut costs. What are the short and long term costs associated with your decision? What is the potential impact on your income?
Consider asking your accountant to help you work through the cost/benefit of various cost saving options.
CUTS TO BY WARY OF:
Don’t Lose Good Staff
Invariably the first place small businesses look for saving is their payroll. And just as invariably thoughtless culling of staff results in needless recruitment and training costs when the owner realises they made a mistake.
If you’ve got good staff keep them! Instead of recklessly sacking look for ways you can adjust your staffing arrangement so that your key staff are protected, whilst other roles are outsourced or set up in flexible working arrangements.
Trim Marketing Costs with Care
Another easy cost cutting target is marketing. When times are tough you probably are going to have to cut marketing, but take care where you cut. Rather than simply slashing your marketing spend, review your current activity and identify the tactics that are working most effectively. Focus your funds on what is successful and trim less successful methods.
You might also want to consider some of our Marketing on a Shoestring ideas – but don’t just stop talking to your customers or you will lose future revenues.
CUTS YOU MIGHT NOT THINK OF:
Office Space: Is it possible for some or all of your staff to work remotely? Could you move to a shared office arrangement?
Outsourcing: With internet companies like Freelancer, Elance and oDesk, plus the growth of virtual workers in the Philippines, it is becoming increasingly easy to outsource graphic design, technology and administrative work. This usually saves money and also builds in flexibility. Check out our Outsourcing blog for more ideas.
Pool Purchasing Power: Are there other businesses in your community or your industry that you could work with to increase your buying power? What about approaching some of your competitors? “Co-opetition” is fast becoming a business trend – jump on board.
Spend Money to Save Money: This can be a hard one when your back is against the wall, but sometimes it makes sense to invest up front to realise long term savings. Is there equipment that would significantly reduce your production costs or increase productivity?
OUR FINAL WORD ON CUTS:
If your business is doing well and doesn’t need to think about cost cutting…think again!
Business owners should have contingency plans in place precisely so they can avoid making poor decisions when things go wrong. Consider what would happen if you lost 20%, 40% or 60% of your revenues and establish a plan of action should these situations arise.
And the final, final word is: ask your accountant for help when making or planning cuts. Not only are they good with numbers, but your accountant should also be able to give you a reality check – separating emotion and ego from business sense.