Marcia Bagnall, SBDC Director
Times are still tight, so are a business owner’s finances. You need to survive this downturn, but how? Now, even more than ever, you need to know your business. And you need to determine what level of cash cushion you feel you need to maintain your solvency over a period of time. As part of your analysis you should know the areas that are viable for cost containment and that could be targeted for streamlining. Most likely you will cut expenses to increase profits allowing you to build the cushion you need for the long term.
You will need to develop an operating strategy for effecting changes. One of the first things you need to do is to set a basic budget floor for the area(s) you will be cutting. When you establish the basic budget, it is critical that you include an amount sufficient to meet all the needs of the department or operations covered.
If you operate machinery or equipment, be certain to budget adequate maintenance and accrue an amount to set aside in case new equipment is required. Cutting too close to the edge could leave you out of production as a result of one major malfunction.
Travel and entertainment are an easy target for tough budget cuts. But, for many companies, these costs are an absolute sales necessity – your customers expect it and your competitors will be hot on your heels if you do not maintain these contacts. In many cases, the loss of business won’t be felt initially and you might feel that you saved money without any effect. Take the time to create a budget that allows your company, through all its sales efforts, to keep up a high profile with your customers.
If you know that your administrative cost is way out of line, don’t just storm through and fire every third person to save money. First, determine what work is essential and how many people it takes to accomplish those tasks. What support do they need in terms of equipment and outside services? Put a number to that to find your minimum floor. But, that is not the level that your have to reach. Always leave room above minimum service. You will do your cutting on the margins above this operational level. If you get down to the bare minimum, you leave very little in the way of real service and have no margin for error. While you don’t need ten people doing the work of five, cutting back too far will mean if someone is out sick or resigns, important work may not get done. Your intention is to be efficient, not at a critical edge with no margin for error.
When you begin a program of serious cost reductions, you should develop a target percentage for the costs and where you are going to focus for the reduction. Spreading the cost cuts fairly across departments won’t ease the difficulty that managers have when budgets are cut, but it will make others feel that this is a group effort and not a punitive attack.