Spending is one area over which a business owner has some degree of control. In response to economic uncertainty, most business owners will plan to cut expenses. The key to cutting costs without sacrificing service quality and profit margins is to know exactly what’s absolutely necessary — and what isn’t. This is the difference between “strategic” and “non-strategic” cost cutting.
The pressures of an uncertain economy can elevate the importance of cost control and balance sheet pressures over intangible expenses essential to the long-term health of your business: customer relationships, brand equity, price margins, comparative advantage and service quality. To avoid “throwing the baby out with the bath water” during cost cutting, profit-oriented business owners identify the spending that is strategic — while aggressively cutting nonstrategic costs.
Strategic costs are the things that make you or save you the most money. For example, for a furniture manufacturer, strategic costs include quality hardwoods and skilled craftspeople. Unless something is directly linked to product quality, excellent customer service, profitable new sales or a feature or service that gives you a defined competitive edge, you should consider it overhead.
Never let non-strategic expenses build up or become “routine.” Here’s how to avoid those expenses:
- Put all your costs up for grabs. Profit-oriented managers create “zero-based budgets.” According to a study of the 80 most productive global companies in Jason Jennings’ book Less is More, profit-oriented executives ask one simple question before making any decision: “What’s the good business reason for this cost?”
- Put in place a monthly budget. You cannot manage what you cannot measure. That’s why 71 percent of business owners agree creating and sticking to a budget is the best way to grow profits. According to SunTrust Business Owner Research, most business owners don’t have or track a monthly budget. Look at your costs over the previous 18 months, and identify duplication, waste or things that can be bought for less. Consider using an online cash manager to easily download expense data for tracking.
- Win the war for talent by capitalizing on a weak labor market. In an uncertain economy, hundreds of thousands of jobs are eliminated by large companies, creating opportunities for growth-oriented smaller businesses to acquire talent not typically available or affordable.
- Bargain shop for deals on goods and services. There is significant discounting and buyer leverage, particularly in commodity goods and in market sensitive industries such as media. Owners can take advantage of price promotions and discounting by competitors. Also, spend time working with your supply chain to explore ways to improve efficiency and lower costs.
- Capitalize on lower interest rates. While credit may be tight, interest rates generally drop significantly during a recession, as the government tries to stimulate the economy. Financially strong companies can save money by refinancing or restructuring commitments during a downturn.