The Need To Be Prepared

We’ve all heard the phrase…”tough times call for tough measures.” Businesses of any size, but particularly small businesses, will experience “tough times.” Due to the reduced margin of error in small businesses, it is critical to have a plan for reducing expenses, and the associated cash drain, before the tough times appear. Are All Expenses Created Equal?

The answer is no. Let’s look at several types of expenses and possible cuts:

Discretionary Expense Cuts:

  • Make these cuts before employee-related cuts;
  • Includes deferring or re-negotiating non-essential expenditures;

Painful Expense Cuts:

  • Usually those directly related to employees;
  • These should only be done after understanding their long term impacts;

What Are Examples of Discretionary Expense Cuts?

Carefully examine your purchasing spend. Can you combine items that you are now buying from several vendors into one buy and have several vendors compete for what is now a larger piece of business? Alternately, there are buying services that will combine your order for non-essential, but costly items, with theirs. For items such as paper, light bulbs, printer ink, shop supplies and other items adding your volume to the dozens of other companies they are already purchasing for can reduce your costs for the same product and brand. Lastly, there are service organizations who can assist in reducing your utility and telephone spend. They are generally compensated out of the savings generated, so they are only paid when you save money.

Make sure that you examine your insurance policies. Working with your broker, you may find savings in a difficult period for your company by increasing deductibles and making sure that assets you’ve taken out of service years ago are not still being insured.

Business travel today has become increasingly expensive. Consider introducing a strict(er) travel review policy or implement a short term travel ban altogether. Go To Meeting or Skype may offer reasonable alternatives to paying for unnecessary travel.

Upgrading your office space, designing that new logo or re-landscaping and striping the parking lot, even if a contract has already been signed, are good candidates for deferral or eliminating if your business takes a turn for the worse.

Painful Expense Cuts– Difficult But Necessary Cuts

It is unlikely that business owners will be able to get all of the necessary savings without touching their most costly areas of expenses—payroll and benefits. How can cuts be made in these areas that are both fair but economically meaningful?

Cuts that get at the edges of basic employment are likely to be the ones best accepted by employees and still can offer significant savings. Consider reducing expensive perks that the company may be offering first. Then move on to items such as 401-k matches that are above what the company’s competitors are offering or possibly increasing premiums on dental plans. If at all possible, try to continue to offer a meaningful medical plan with minimal to no changes. This will likely have a positive long term impact on employee loyalty.

If additional savings are needed, consider reducing the work week. These savings will drop directly to the bottom line. As a last move, look at reducing actual headcount.

As employees are undergoing these reductions, they will rightly expect the senior people in the company to “share in the pain.” Salary reductions and/or eliminating positions at the senior level must be part of the equation.

How expense cuts are instituted will say a lot to your employees about how prepared you are to properly run your business and where your priorities lie.