By Don Sadler
When companies become distressed, the first reaction by business owners is often to start slashing costs and cutting back on growth projects. While getting lean to adjust to the economic environment is a wise strategy, companies should be careful not to compromise their business by cutting too much. Small business owners need not sacrifice long-term growth when the times get tough.
Lean on Human Capital
When the financial collapse of 2008 was weighing heavily upon the global community, Chris McMurry decided to turn to his employees for help. As chief executive officer of McMurry, he believed in his employees' ability to band together and ride out the storm.
McMurry could have taken the slash and burn route, cutting expenses to shore up margins over the short term. “We’re not big into cutting things, and we don’t take the easy way to improved margins,” says McMurry. “Instead, we count on our people to help... prepare and batten down the hatches just in case the storm came our way. I suggested that if every person at McMurry found $400 a month in savings, the company would save around $800,000 in a year."
Of course, not every effort or idea turned out to be a practical cost saving initiative, but it did implement a culture of savings and smarter spending that really did contribute to the bottom line. The culture that was established built the foundation for growth once economic conditions improved.
Cutting too Deep
Obviously, desperate times call for desperate measures. If there simply isn't enough cash to pay the bills, a business owner may have no choice but to make big cuts.
But it could be a real mistake cutting costs across the board without considering how that might impact sales or if it will put the company at a competitive disadvantage. As Adam Bezark, a certified public accountant says, “Not all overhead expenses are the same. You need to think about the return on investment and intangible effects of your expenditures.”
There can be the temptation to panic and get the company as lean as possible, as quickly as possible, to the detriment of the company's future. "Sales are down and companies make across-the-board cuts, trimming the marketing budget along with the coffee and doughnuts. Spending less on marketing only implodes sales further,” Bezark notes
Plan For the Short and Long-Term
Before implementing cost cutting measures, companies need to plan carefully. Janet Boulter, president of Center Consulting Group, believes the obvious first step is to eliminate excessive spending and waste. “Take a fresh look at the products and services you purchase - everything from office products to cell phone plans - and evaluate the benefits,” Boulter says.
Part of that planning process includes addressing existing relationships. Before enacting aggressive cost-cutting actions, firms should try to get better quotes from vendors, renegotiate office leases, closely examine travel expenses, eliminate unnecessary subscriptions and memberships, and cut back on entertainment expenses.
These lesser cost cutting measures should precede bolder actions that must be taken. In some cases, companies under greater duress must make some tough choices. These include reducing work hours, ending 401(k) matches, reducing the percentage of employer health care payments, or letting employees go.
Boulter notes that, “In more drastic situations, layoffs may be required if the long-term projections for sales do not support the current workforce. While no owner ever wants to reduce the workforce, it is sometimes the best decision for the company.”
Trim Down and Start Again
After doing what cost cutting needs to be done, companies should approach business as a fresh start. Being leaner doesn't mean that businesses should stop planning for the future.
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