Most small business owners at some point are faced with having to cut costs. But some do not realize the need to take action until they are finally faced with an imminent threat such as not making payroll. Others who use cash projections are able to cut costs based on advice from the financial analysis of their business that enables them to take steps much sooner and that are well thought out.
In the first step of the cost cutting process the small business owner needs to determine how wide the gap is between cash coming in and cash going out of their business. The amount of any shortfall and how long it will continue greatly determines how deep the cuts need to be and how quickly they should be done. Cash flow projections provide this insight, but the time to do them is sometimes too consuming for small business owners to do, so they should consider seeking out those with the relevant expertise to obtain the right advice and insight for cost cutting.
Here is some fundamental advice for a small business needing to cut costs.
In the event that the company’s poor cash position is the result of slowing or falling sales, the owner should promptly assess the performance of sales personnel. This is particularly important because not only is the salary of an underperforming salesperson consuming critical cash, but that individual is holding a position that a more productive sales person could be in. If this is not addressed, a business owner may begin cutting other personnel who otherwise would not be let go. Paying un-productive sales people is one of the top drains on a small business.
Keep in mind that sales is the engine of a business and when sales are falling short, the impact ripples across a company. Now faced with making actual cuts the owner should focus on steps that will have the least impact on business operations. How this is done is critical so current customers continue to receive quality products or services and important infrastructure is kept in place while waiting for the business to re-bound.
Moving further into both operational and non-operational areas, a close evaluation typically uncovers some fat that can be reduced quickly. However, labor which is often a large budget item that includes not just salaries, but bonuses, health care and other perks is particularly difficult because cutting personnel is very personal and therefore many owners avoid this painful step for too long. There are a few ways to manage this hard step that may include asking some employees to work part-time or freezing salaries before actually doing layoffs. Having a good rapport with workers often makes this difficult process less difficult. The cash position of the company should be very poor before cutting such personnel because unless the worker has a special affinity toward the company or owner, they may leave and encourage others to do so as well.
In some instances when sales are quite high, the business may not be showing a profit and that is typically seen through dwindling cash levels. Cutting costs in this case is a more complex challenge that may be tied to poor operational performance and inefficiency, as well as needing a better understanding of the financial structure of the business in the area of profit margins.
For some businesses the pressure to cut costs may push them toward technology that will improve productivity. A one-time investment in technology may displace high labor costs for years to come—offering a solid return on investment. It is fundamental that an owner be aware of the technology used by their industry competitors.
Even if the company does not have cash to purchase technology, with a healthy balance sheet and potential efficiencies being clear, a lender may provide financial assistance to move the business forward. In this case projections are again an advantage because the business owner can gain outside financial support more quickly.
When building an enterprise or in a period when costs must be lowered, an entrepreneur and small business owner should have in place a detailed outline of their operational processes. They then can review each aspect of their operations on an ongoing basis to push for improvements and efficiencies one step at a time. This fundamental knowledge about their company’s cost structure in terms of delivering their product or service, puts them in the best position to avoid challenges before they are required to do extensive cost cutting. The detailed outline and diagram of the business’ operations plus the use of financial projections are two of the most important tools a business owner has to build a sustainable and successful business.
Read more: Small Business Hiring Challenges Eased by Automation
Jeanne is the Publisher of American Entrepreneurship Today, a web site dedicated to helping entrepreneurs and small business owners to succeed. She consults via AEP LLC., as a growth strategist, steering entrepreneurs through startup pitfalls, while identifying resources and opportunities that catalyze a venture to a greater level of success. Copyright AEP LLC 2019-2020
