There's a right way and a wrong way to develop cost cutting mechanisms and taking a haphazard approach has the potential to backfire and leave your enterprise in ruins.
Not every budget cut needs to be created equal.
The biggest mistake management can make when setting cost reduction goals is to try and “be fair” by reducing expenditures by a set percent equally across all departments. In general this ill-advised strategy is implemented when a business is reacting to a financial crisis as opposed to carefully planning for the long-term.
The bottom line is that no cost cutting measures will yield results overnight so even when you feel like you're in dire straights, it's imperative that you take the time to develop a well thought out plan and resist slashing expenses with a machete.
While there certainly exists opportunities for savings in every single facet of your business, it's important to analyse which departments are directly contributing to your bottom line and to distribute reduction goals accordingly.
For example, it wouldn't make sense to cut 10% of your sales force if direct sales is your primary driver for drumming up new clients.
Always remember that you're in it for the long-haul.
In a downturn, the natural tendency is to look for short-term projects with quick but often low-yield ROI. While it certainly makes sense to look for revenue streams that can keep your business afloat now, don't make the crucial error of funding said initiatives by cutting mid-range and long-term opportunities.
Your strategy needs to take into consideration a careful balance of both present and future goals, and one way to do this is by protecting your strategic investments. Sales, marketing and R&D are areas vital to your company's future prosperity and they need to be treated carefully even if the benefits of these initiatives won't necessarily be reaped over the coming fiscal quarter.
A great place to start but not the end all be all.
Begin your cost cutting by looking at the obvious. Wasteful or unnecessary G&A (general and administrative) expenditures are the easiest to identify and also the least painful to yank out of your budget. By pruning back spending that does not directly lead to revenue you're putting your company into a win-win situation.
Additionally, don't be afraid to shop around for new suppliers or other outsourcing services contracted by your company. Often times we allow familiarity with our vendors to lead to complacency and we overlook the fact that new competitors may have entered the market offering more favourable prices.
The problem is that very few businesses will be able to find sufficient fat to trim simply by looking at G&A. Reducing your external spend is a start, but it's just that, a start. Without taking an enterprise wide view of cost cutting you are unlikely to make changes that are significant to the overall financial health of the company. Cut the easy stuff first, and then move on to the more critical departments such as supply chain management, manufacturing, and so on.
Patience is a virtue.
While progress certainly needs to be monitored monthly, any successful cost cutting proposition will have its true results measured in twelve month increments. Trimming expenses needs to be part of the business planning process but not relied on as the answer to all of your problems.
Expecting miracles from cost cutting is as dangerous as purchasing lottery tickets in lieu of annuities for your child's university fund. To cut costs properly takes time and it could be up to a year before you see significant benefits on your balance sheet. If you don't have twelve months to wait, you may need to consider taking a loan as a stop gap measure to help your business weather the storm.
Author, Taso Tounis
Taso Tounis is a business planning and budgeting consultant. He is passionate about helping business owners, organisations’ leaders and managers achieve better financial results, through insightful reporting.
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