How can a business save money in a crisis and what should not be saved on?
There are two ways of increasing the profitability of a business: by increasing revenue or by reducing costs. The optimal way is to combine these approaches. In normal times, this is a matter of company profitability, but in times of crisis, your survival depends on it.
How a company will reduce costs is a decision to be made both by economists when planning indicators for the next period, and by top managers within their departments.
In this article we will analyze how a company in the crisis can cut costs and not lose income.
What do business costs consist of?
Business costs are divided into variable and overhead. Their composition varies depending on the stage of business development. The main disadvantage: there are costs even when there is no income. Therefore, it is important to clearly understand what the costs consist of each month, and how they can be reduced and optimized.
Overheads (fixed costs):
- Rent of premises
- Wages and salaries
- Taxes and other deductions
- Production cost
- Logistics
- Technical equipment and amortization
- Provision of IT-infrastructure
The composition of expenses varies depending on the area of business. When a company has a clear schedule and accounting of overhead costs, they are easier to optimize. For example, a lease contract can be renegotiated on more favorable terms. Or reschedule a payment date if the company doesn’t have enough money.
Variable costs:
- The cost of raw materials or constituents in production
- Costs of selling products for the service industry
- Advertising and marketing
- Representation expenses
- Replacement of equipment
- Launch of new products or expansion of business
Approaches to company expenses optimization
The right cost optimization strategy seeks to redirect resources to activities that generate revenue. For example, strengthening the sales force is the division that directly generates revenue.
To optimize, it is necessary to analyze the company’s activities and find out which areas provide the greatest return. Next, you need to fine-tune all aspects of the company’s operations, from formal actions to mindset. The next step is to focus funds on the company’s unique distinctions.
To intelligently optimize and reduce costs, work through four elements.
- benchmarking. Compare yourself to industry leaders. Analyze your costs and others on at least the basic parameters: EBIT
Engineering, purchasing, sales, administrative costs.
Operating costs.
This way you will find potential for cost reduction.
IMPORTANT:
Optimization should not contradict your competitive strategy. Don’t cut spending that ensures you add value to your products and allows you to stay competitive. If you sacrifice quality or a feature, you will lose the argument for “Why should the customer buy from us?
- the information field. When the company owner and the top managers have decided which areas of the company will receive more funding and which will receive less, it is important to convey this information to each employee. A couple of statements “from the top” are not enough. Everyone needs to be aware of the new strategic goals and act in accordance with the new work logic.
Make sure that employees take the orders seriously, rather than treating them as “just another idea” of the manager. Jack Welch proved the effectiveness of a single message and repetition of basic ideas. Thirty years ago, he adopted a strategy to make General Electric the most competitive company on the planet.
To do this, it was decided to focus only on those markets where the company could become No. 1 or No. 2. General Electric had a few dozen employees, so Welch announced the new strategy at the main meeting with 500 top managers, repeated it at every monthly meeting with the company’s leaders, and broadcast the new goal in every message he delivered. This is how he communicated the idea to every employee of the corporation. - organizational structure. When a company adopts new strategic goals, the old model of organizational structure may not be effective.
This causes overstaffing, assigning responsibility for a task to several people at once, and reducing the value of the end result. Sometimes individual work groups or entire departments focus only on their process to the detriment of global plans. Optimize the staff, reallocate areas of responsibility, do not lose productivity. - Decision-making principles. Each employee during the working day makes many decisions about the allocation of the resource of time, effort, and finances. The task of the owner and managers is to make these decisions in accordance with the new priorities of the company.
For example, if you rely on product quality, you can follow Toyota’s example. Every employee of a Japanese car brand has the right to stop production at any time if he sees a decrease in quality. If your employee needs more time to negotiate a supply agreement, but gets better terms, let him or her spend that time.
Strategies for reducing business costs
All cost reduction strategies fall into 3 groups.
Net cost reduction is the actual cost reduction by getting rid of non-productive costs. For example, getting rid of non-core assets.
What you will get: increased profitability of the business.
What you will need: a detailed analysis of the company’s costs, because otherwise you risk reducing the costs you really need.
Risks: employee dissatisfaction is possible.
Cost intensification is a model in which the company increases costs, but also increases profits. For example, introduction of new technologies or new equipment.
What you will get: employees support the management and are motivated for the result, revenue growth, increased profitability.
What you will need: to calculate in detail the feasibility of investment, sufficient sales market.
Risks: if investments are miscalculated incorrectly, the company will spend financial reserves and worsen its condition.
Cost fixing – a model where the company increases revenue and costs remain at the same level. For example, an increase in prices or an equal increase in productive costs and a reduction in nonproductive costs.
What you get: increased profitability.
What you will need: accurate financial costing.
Risks: With an increase in the number of products you can’t avoid an increase in costs.
Which business costs to reduce first of all
Make a complete list of your expenses, put them in a single table and highlight those that are easy to reduce, and it will not affect the company in any way.
Office rent. Often companies start out “posh” by renting spacious offices downtown. When you have a stable, growing profits, you can afford such an office. But in a crisis this should not be allowed. There are three ways to reduce the cost of the office:
- Negotiate with the landlord move to another office transfer the whole or part of the team to a remote working format (if the business allows) and thus reduce the area of the rented office
Rent of premises. The cost of renting retail space takes up most of the offline business’ expenses. To reduce them:
- Renegotiate lease terms with the landlord sublease part of the space move to cheaper premises
It is important to keep in mind that for some businesses location is critical, and a change of location may reduce income. For example, if your point of sale is located near the subway, a cafe near the business center, the service equipment repair in a passable place in the shopping center, then you can not change the location. Many businesses are successfully mastering online venues for trade, and they have no need for offline outlets.
Expensive and unprofitable purchases. You spend money on advertising, the time and effort of sales managers, paying for storage (if it’s merchandise) or a tech base (if it’s services). And are you sure that all of this generates a profit commensurate with the effort?
- Be skeptical of your assortment and discard items that bring in little revenue.
- Refuse to purchase low-margin items.
- Rewrite your contract with your suppliers and include a clause about the ability to return unsold merchandise.
- Sell off illiquid goods. Anything you’ve had hanging around for a long time and not selling is a great tool for a promotion.
- It’s unlikely you’ll make any money on it. But you’ll definitely free up money and be able to put it toward growing your business.
Bloated staff. When your company is doing well, you can afford to hire additional employees to work comfortably and create more focused centers of responsibility. In a crisis, you have to cut back on staff. Remember that layoffs are a last resort. You should always hold on to your team to the last. But there should be a backup plan.
Do an ABC analysis of the staff and figure out which positions in the company are not necessary. If the people in those positions are also unprofessional or toxic, those are the first candidates for downsizing.
Some services can be outsourced. For example, it will be more profitable for many companies to outsource a lawyer or accountant than to keep them on staff.
Unprofitable clients. You are sure you have customers who are more “mind boggling” and wasting your time than profitable. Weigh up whether it’s more profitable for you to give them up and spend your time on more profitable activities.
What business expenses must not be cut.
Inventory Maintenance. For manufacturing companies, reducing inventory is a big risk that can potentially even lead to the closure of the company. In a crisis, logistics and production risks already increase. If you reduce inventory, you run the risk of interrupting product deliveries. The slightest delay and your place will be taken by competitors and customers will forget about you in a week.
Advertising. Almost always such a decision leads to losses, unless the company chooses a completely new marketing strategy with the methods of “guerrilla marketing”, “advertising without advertising”, etc. Advertising is an investment that generates 200 percent, 500 percent or more in revenue. Do you know of other investment tools that give that kind of return? Why you can’t cut the advertising budget in a crisis and how to create a new marketing strategy was told in detail in a previous article.
Maintenance and repair. Like advertising, this is not an expense, but an investment. Working equipment brings income, and the period of downtime is a loss. Therefore, by saving insignificantly on repairs, you lose significant amounts of income.
Quality control. You can choose the anti-crisis strategy of “reducing quality for the sake of retaining the same price”. But this does not mean that you should give up control. Even if you reduce quality, it remains at a certain level, which must be maintained. And this applies both to the physical properties of the goods, as well as the quality of service, customer service and after-sales service.
How do you know if you’ve cut costs correctly? Make a chart of income and expenses. Revenues should be growing. And expenses should decrease, or at least remain at the same level. To stay on track, keep track of 4 indicators: revenue, average check, number of purchases, and customer return.