When a company is having a problem with a drop in sales, or a cash shortfall, management needs to find real reductions in expense. Many strategies will work in a number of industries.
Reducing Salary Cost
In many industries, salary and benefits are major components of expense, up to 80% of total cost of business in some sectors. A reduction in work force (RIF) can reduce cost, but generally takes time to take effect. There can be the immediate cost of severance, outplacement assistance or benefits that delay savings.
A better short term effect is the reduction of hours from full to part time, or cutting the work day, for example from eight hours a day to seven. Lunches can be expanded in order to maintain coverage.
Reducing overtime is a key strategy for immediate savings. Hourly employees, especially those on time clocks can earn incidental overtime, loosely defined as extra tenths or quarters of an hour by clocking in early or out late.
Any kind outside labor, or contract labor should be reviewed. Companies pay a premium for contract labor, and unless the contract stipulates a certain number of hours, these hours can be reduced quickly in a crisis.
Some industries utilize bonuses for coverage or payments for employees to be on-call. These should always be watched closely, and if not needed, can be cut first.
Position controls are listings of employees and positions listing the scheduled hours for an employee. If a position control exists, management should compare the actual worked hours to what is scheduled. They may find that some part-time employees are working full time hours.
Cutting Supply Expense
Another large area of cost in many companies is supply expense. During a major downturn, businesses can save cash by spending down inventories of supplies.
If an item is recognized as inventory on the balance sheet, cutting into inventory will not result in an expense saving, since this will just reduce an asset the next time supplies are inventoried. It will save cash, however, and this generally the most important goal.
If the supply is expensed when purchased, using up excess stock will reduce both general ledger expense and cash outflow.
Reducing Other Expenses
Short-term savings can be achieved by cutting other non-necessary items:
- Purchased Services – Anything that is bought from vendors outside the company should be questioned. If an service can be brought inhouse using current staff, employees are better utilized and expenses reduced.
- Travel and Seminar Expense – Cutting education may be a negative in the long run, but surviving to make the long run may require cutbacks. Alternatives such as webinars and distance learning may prove to more efficient and equally valuable.
- Preventative Maintenance – This tactic may prove to be short-sighted, because not maintaining equipment will be costly later on. It may be necessary to postpone cosmetic repairs or delay others. Equipment that is vital to core operations should be maintained in top working order.
Getting past a difficult period for the company will involve tough choices, but strengthening the business can help the business survive the downturn.