Recession Strategies: Cut Costs Strategically
OK, so we’re in a recession, and a really bad one at that. Ask the experts how long it will last and you’ll hear everything from 5 or 6 more months to 5 or 6 more years. One thing is certain, though—everyone agrees that it won’t last forever.
So what do you do with this not-so-helpful bit of information? Here are a few ideas for ways to avoid some of the common mistakes of past downturns—and get a head start on your competition at the same time.
It Starts With Cost Control
Financial strategies for any company in these uncertain times should consider the company’s fundamental strength in designing a cost control program. Across-the-board cost reductions, so common during times like this, are fairly easy to initiate, but can be damaging to a company’s foundation over the long term. Instead, consider these guidelines for creating a more effective cost reduction program:
First, focus your staffing reductions on marginal performers throughout your workforce. This is an excellent opportunity to relieve your payroll of under-performers with minimal risk of backlash or legal exposure. If you have delayed having a confrontation with these employees or their managers, do it now. (Your potential legal exposure, of course, is based on your individual situation, and you should always consult a labor attorney in questionable cases.)
Second, cut costs in areas that will not impede your recovery or affect critical current programs. You can cut these costs sharply or eliminate them entirely. Examples include planned enhancements to employee benefit programs (even if announced) and replacement of inefficient equipment that still keeps up with demand. Then initiate efforts that will reduce costs without cutting into capability. A good example might be refinancing of corporate borrowings at lower current interest rates.
Third, cut activities that must be retained long term but can be delayed or reduced to an inactive state for six to nine months. For example, you could shelve an accounting system conversion for now, even if the software has been bought and paid for, thus saving thousands of dollars in implementation and training costs. This assumes the prior system isn’t crippled and unworkable in the interim.
Fourth, consider investing money in programs that can benefit your cost control program or add power to your readiness for the recovery. For example, finish the partially completed development of a new product that will be the market leader in a high-demand environment when it ships. Or hire a few outstanding people in critical departments that were not previously impacted by layoffs. In other words, feed your winners.
Protection and Preparation
In a nutshell, you want to protect yourself during the downturn while preparing yourself for the recovery. When that time arrives, you want to be in a position to move out aggressively, take advantage of your weakened competitors, and add market share and profit margin. It is important to think strategically during these times—because when the recession is finally over, it’s going to be a very good year.
Gene Siciliano is author of Finance for Non-Financial Managers.
www.CFOforRent.com
Copyright 2009. All Rights Reserved.
