Determine Long-Term Strategy Before Cutting Short-Term Costs
TEC Worldwide is an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems. The following questions and answers are based on discussions at recent TEC meetings in Southern California.
Question: Thanks to the slowdown in the economy, we won’t make our budgeted sales forecast this year. As a result, I need to cut expenses by 5% ($300,000) to stay in the black. We can save $150,000 by canceling a computer systems upgrade and $100,000 by postponing scheduled pay increases for the staff. My managers also have come up with an additional $50,000 in savings here and there. This would seem to take care of things, but I’m afraid employees might jump ship if we postpone the pay increases. I’m also concerned that we may lose some key customers if we don’t upgrade our computer systems. Any suggestions?
Answer: First things first, said Karyl Gately, president of Shea Mortgage in Walnut. Have you truly determined whether your downturn in sales is the result of the economy, or might internal factors be the culprit?
Either way, you still need to cut costs in the short term. But your long-term strategy will depend to a great extent on whether your sales will rebound with the economy or whether you need to make changes in your sales force and/or internal operations, which may require making an investment (rather than cutting costs) to return to profitability.
Second, have you determined your strategic priorities? For example, if your industry is truly experiencing an economic downturn, is it more important for your company to maintain market share or make a profit? Is retaining key employees a must or can you replace them without too much negative effect on the company? Plus, what about taking away market share from competitors?
During a soft economy, strong companies often can take advantage of opportunities to grab market share from struggling competitors. Depending on the strength of your balance sheet, Gately said, it may make sense to bite the bullet and make the investments if you can gain substantial market share.
Third, have you explored all possibilities when it comes to cutting costs? People usually don’t have much trouble identifying the big-ticket savings, but you would be amazed at how the little things can add up. Have you given each manager specific objectives in terms of hard dollars or percentages, or have you merely asked them to save some money here and there? You also might want to consider offering financial incentives for people who come up with significant cost-cutting ideas.
Another area for consideration is your company’s culture. Do you share financial information on a regular basis or is the staff mostly in the dark regarding company performance? How do people react to bad news in your organization?
If you honestly and openly explain why cuts have to be made, will people pull together and rally around the common cause or might it lead to open revolt? Keep in mind that there’s more to cutting costs than hard dollars. People issues also play an important role.
The computer upgrades may sound like a necessary investment to forestall loss of market share, but Richard Kreidel, president of Adams Rite Manufacturing in Pomona, said he would suggest a different tack.
“Upgrading your computers might offer a way to improve customer service and keep from losing market share, but that’s more of a long-term solution,” he said. “Cash-flow needs should take priority over capital investments.
“Plus, implementing new computer systems always costs twice as much and takes twice as long as you expect. You could spend the money and still not get any immediate results, which would only exacerbate your current situation. For these reasons, I would recommend forestalling the computer implementation and making whatever short-term patches you can.”
George Mayer, president of Pallets & Accessories in Riverside, said he would caution against postponing the planned salary increases.
“We reduced salaries across the board during the last recession, and it did not work out well at all,” he said. “People feel a salary reduction every paycheck, which means the issue rears its ugly head every one or two weeks. Plus, the pay cut bothered me as much--if not more--than anyone else. If I had to do it over, I would trim some personnel and make do with less people.”
In addition to cost-cutting solutions, Kathleen Ellison, president of B & K Electric Wholesale in Industry, said it is important to look for ways to generate additional revenue. Are there any opportunities that may be easy to implement that could generate revenue to offset the downturn in other areas? She also recommends tightening up on accounts receivable and negotiating with your vendors to extend payables as much as possible.
Although it’s too late this time around, the ideal solution involves setting up contingency plans so that you don’t have to make these kinds of tough calls under duress.
“During our annual business planning process, we make sure to incorporate a contingency plan that spells out what to do if sales fall significantly short of projections,” Shea Mortgage’s Gately said. “We do the same in case sales turn out to be more robust than anticipated. Either way, the key is to formulate the strategy ahead of time, when there is no emotion attached to the situation.
“That way, when a downturn or upswing happens, we can refer to our plan and make decisions without a sense of panic because we’ve already thought through what we need to do.”
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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit https://www.teconline.com.
