Renaud

Step 3: Cut costs with a scalpel, not a chainsaw!

On a recent trip to Canada to compare economic news I was impressed by a recent article in Fortune magazine (December 15, 2008) where they ask 3 experts on how to cut costs during a recession. The experts were: An executive of a low cost airline, a SVP at a medical supply manufacturer and a consultant at Bain &co. Here are the three questions that were asked and a summary of areas where you can implement immediately.

1) How do I know where I am spending too much?

• a) ‘Our team regularly goes each budget line by line. However cuts are made where there is the least impact on customers. We don’t take a chainsaw to cut costs - we prefer to be more surgical’.
• b) Bring in third party groups that specialize in benchmarking. ‘We compare our supply chain with companies like Walmart’. We look at our systems to see if we have redundancies.
• c) Create a dedicated (cost cutting) team and have each person spends 50% of their time on it.

2) Are there cuts that are worth making?

• a) There are things that we will never cut because it reinforces our corporate culture like bringing in customers into our head office to tell us how our products are doing.
• b) Prioritize. First take on cuts that are large and easy to implement like consolidating suppliers (see below). Be careful with changes that bring small savings but come at a big cost like cutting off coffee for staff which may lower morale.

3) What are some of the reductions that companies often overlook?

• a) Some companies don’t look at creative ideas to avoid layoffs. To prevent overstaffing consider a voluntary leave program without pay or flex time. In this case employees keep their benefits and you get a reduced payroll while having access to trained, on demand staff.
• b) About 50% of costs for most businesses are associated with purchases. If you go after your supply chain and those costs, you can possibly avoid layoffs. In many ways it’s free money and easy to implement. Layoffs will cost you more in the long term when the market picks up again, and it will pick up again.

Making your business more recession proof

Here are a few more jewels that I have found that is, simple strategies you can use to make your business more recession-proof:

Cash is King - liquidate some assets and get rid of dead of stock. Start keeping some money aside in case the economy does indeed get worse. Invest in defensive stocks that have been known to hold their value in a recession.

Good records - keep your business records up to date so that you always know how you are faring. The more robust your records are the easier it will be to move faster in the case of a slump.

Batten down the hatches - When business is slow you have more time on your hands to look at ways of cutting costs. Cut down on wastage and examine all your outgoings to remove or reduce all unnecessary expenses.

Speak to your lenders - this is the right time to keep communication lines open with banks. The credit crunch is hitting them hard so it might also be a good idea to open talks with another lender just in case your bank pulls the plug. With your existing bank, you get may get a bit of push back when discussing skipping payments since this is quite new in Romania. You are not asking to ‘not pay’ - you are asking to capitalize the interest to a later date. This will extend the term of your contract but the cash flow will help you temporary. However keep pushing. Most Romanian banks are owned by foreign banks and this is a well known option in home markets.

Examine your loans - in a recession interest rates tend to fall as the government tries harder to stimulate the economy. This is the ideal time to collate all your loans and possibly switch to longer payment terms and / or fixed rate loans. The US has dropped interest rates to between 0 and 1% and you could re-negotiate your loans to get better rates.

Negotiate harder with your suppliers - Ask for longer payment terms and demand quicker delivery times so that you do not need to have so much money tied up in stock. They will want to cooperate and keep you as a client and they will expect this request.
Improve your credit control - cash flow is king in a recession so meet all your customers especially the ones that are more delinquest. Send regular reminders and statements followed by a phone call the minute an invoice is overdue. Some clients take advantage of a recession and may tell you that they cannot pay. If you insist with the proper follow up you will first in line to get paid.

Reduce the amount of credit you extend to your customers,” says Scott Shane, professor of entrepreneurial studies at Case Western Reserve University and author of Illusions of Entrepreneurship. “Get the money fast by offering a discount” to those who pay up immediately.

Insure your Debt - in a recession more of your customers are likely to fail. This kind of insurance exists in North America. Find out if it’s possible with your insurance company in Romania.

Videoconference instead of travel. Costco in the USA reduced in-person meetings with videoconferencing. In late 2007, 59 Managers that typically traveled began meeting virtually every other month. The savings: $750,000 US in 2008 and $3-$5 million when they roll out nationwide. Consider Skype if you have not done so up until now.

Increase your Marketing - Yes increase! This is the worst time to reduce your marketing budget. The aim is to keep and hopefully increase your market share and the best time to do this is in a recession. This is the best time to continually communicate to your customers inexpensively (email and newsletter, appreciation letters, sending a brochure, loyalty program updates) and a perfect time for you to get out of the office and talk to customers - you may uncover other services that they need and they give you a few ideas like the ones in this article!