Recessionary Cost Cutting

One thing that any small business can be secure of is the need for cost cutting during economic recessions. Although companies strive to be as lean and efficient as possible in the best of times, recessions force them to find even more inventive ways to trim expenses. The goal for a small business is to maintain relationships with its stakeholders and to maintain credit quality. The ability to preserve stability in tough times will be rewarded with an improved reputation with business partners when the economy regains momentum.

During recessionary periods, owners find that the level of cost cutting required is often a function of their percentage reduction in sales. To achieve the necessary cuts, to bring expenses in line with income, most owners need to determine what resources are crucial to driving sales and operating the business.

Since major expenses are either variable (change with the variation in sales) or have already been analyzed well, cost cutting during a recession involves trimming those expenses that are not at the forefront or are not due for payment on a regular basis.  These are expenses like magazine or newspaper subscriptions that are not crucial to the business and are usually not thought about until the annual renewal period.  In order to find these additional cuts, one needs to go through the financial statements or last year’s expenses with a small tooth comb to look for non essentials.

So what other expenses are likely to fall in the non essential category, those that are not immune from cost cutting.  Items that can be trimmed or eliminated completely are gym or other unused memberships, insurance policies that have not been reviewed for some time, overstocked supplies, or any company subsidized expenses (such as lunches, transportation, or entertainment).  Memberships can be put on hold and then restarted later, insurance policies can be shopped around and coverage changed without removing essential coverage, and company expenses for employees can be can be reinstituted when finances increase. 

Administrative expenses including office supplies can usually be trimmed by being more disciplined about working more efficiently.  Going paperless and discontinuing sending or printing documents on paper can significantly reduce the expense for paper and ink.  Reduce the amount of paper enough and you can reduce the amount of office cabinets and the cost of space to store all the paperwork.  Electronically file your entire client and business documentation and you may be able to significantly reduce your office space and perhaps the labor paid to manage it all.

Cost cutting does not necessarily mean that you have to do with less.  It just means being smarter and more cost conscious about how you acquire resources.  For example, bartering has become an economically viable replacement for paying for goods and services.  In barter exchanges both parties make out well, if both require the goods and services that the other provides.  This is because neither party has to pay a premium or profit on the goods because, in theory, the goods should be equivalent in value.  In addition to getting a good deal for supplies, companies that barter should be able to retain more cash.  Although most entrepreneurs perform informal barter exchanges, those that want to get more heavily involved can join barter exchanges that have more formal arrangements. However, excessive bartering may keep your business from being able to bring in enough cash to cover expenses such as salaries (which cannot be bartered away).

Other cost cutting strategies include changing the way the company does business.  For example, in the long run, buying equipment can be cheaper than leasing it.  However, leases can significantly reduce the monthly cost of equipment, especially for those that were originally financed.  Leasing not only reduces the cash outlay, but it can also allow the company to use the latest model which can be traded in for an even newer model when the lease expires.  Buying equipment also leads to obsolescence over time.  It is best to lease and turnover high tech equipment that loses value and efficiency over time as new technologies come on line.

Recessionary cost cutting has one advantage.  Since all companies usually feel the pinch during a recession it can be a good time to renegotiate a contract or a vendor agreement that was made when companies were financially sound and had more leverage when making deals.  Suppliers and vendors may also be willing to help you out and reduce costs in the short term since every client that goes bust will have an even greater negative effect on the bottom line.

Your customers might also appreciate solutions that save money for the both of you.  Conference calls in lieu of person to person meetings can curtail travel expenses and may be an acceptable solution during tough financial times.  Small business in the local community may also be willing to work together to reduce costs, such as starting a buying Co-op to buy materials in bulk.

Since cost cutting in a recession means cutting an already lean budget, companies that innovate and find new solutions to the problem are usually more successful.  Finding short term cost cutting solutions may result in your company emerging even stronger once the economy strengthens.