Many business owners face the same dilemma this upcoming budgeting season: how to make ends meet. Despite pockets of success stories, most data points to businesses struggling in general. Several surveys have shown just how deep the impact has been.
Alignable found that by April 4th, 43% of businesses had temporarily closed and 39% had reduced employment. At that time, owners surveyed said that if the crisis lasted longer than 4 months, only 47% thought they could survive. We now know that the crisis is well into month five in most places.
At one point, unemployment had increased by over 180%. Real GDP growth in Q1 was negative, and not just by a little.
Despite strong earnings by Amazon, Walmart, and your local liquor store, most businesses are struggling. Most businesses can’t currently afford a drop of 10-30% in revenue over a sustained period. Looking at 2019 data compiled by NYU, very few industries had a net profit margin of more than 15%. The total public company net margin, excluding financial companies, was only 6.4%. To put this into English, for most companies, a drop of 15% in revenue put them at break-even.
Public companies have access to capital markets that most private businesses don’t. This means even a small drop in revenue can push an otherwise sound business to the brink of financial chaos.
As a result, this budgeting and planning season will be an exercise in cutting expenses for most business owners. The cost-cutting process can be challenging since most businesses already operate on such a lean structure. This is a time for owners to lean on their accounting or virtual CFO resources.
In this article, we break things down by three different levels – What does cost-cutting look like if you need to cut 10%? 20%? Or 30% of expenses?
Ideas to Cut 10%
Most businesses can cut 10% without significantly changing the organization. With all approaches, the recommendation is not to cut just one expense. Instead, take a strategy to look at several areas to make the incremental cuts needed.
The most manageable expenses to key in on are those that don’t help directly generate revenue. For instance, meals and entertainment, office supplies, or events. Most of these expenses represent 0.5-2% of revenue each. By reducing a few of these, a business can easily cut 2-3% of revenue.
Renegociate Recurring Expenses
When I started working with one of my clients as an outsourced CFO, they wanted me to do a deep dive into their expenses to find waste. We were able to cut some expenses by over 40% easily. I started with cable, internet, and phone. By switching vendors and agreeing to a contract, our $400 expense was reduced to $180.
The next step was to look at the trash service. This client was having their dumpster emptied three times per week. We were able to reduce to once per week and save over $300 per month.
Lastly, we looked at merchant services. This company was paying over $700 per month in merchant services. By changing vendors, we reduced merchant services and eliminated one of our software vendors by going to Square. This saved us over $275 per month.
When you add it all up, this is close to $1,000 per month. These savings represented about 2% of savings per year for the company.
There are several other areas of low hanging fruit for most businesses. For instance, shop your insurance around, make sure your employees are correctly classified for worker’s comp, or review your software vendors.
Freeze Pay Increases
Though this seems obvious, it is usually overlooked. Almost every business owner worries about employee retention and, therefore, increases pay regularly. Do research on job sites and elsewhere to see where your employees stand relative to the marketplace. If they are not below the market, consider holding the average pay increase in your company to 1% or 2% or not increasing at all. During times like these, most employees will understand.
Ideas to Cut 20%
Businesses that need to cut 20% are looking at severe cost reductions. With cuts in this range, businesses often need to examine how they are doing business and evaluate changes.
Look at Low Margain Service Work
Most service businesses have an array of offerings. For instance, I worked in a public accounting firm for years which had audit, tax, and consulting services. Underneath each of those, there were several subsections. For instance, in audit, we would audit public companies, private companies, oil & gas, benefit plans, and more. Each of those had different profitability associated with them.
Now is the time to look at your service options and figure out the profitability of each. When eliminating one, you can often find some headcount that can be eliminated as well.
Debt is not an item that directly hits any expense category. However, debt does have a significant impact on cash flow. Now is an excellent time to talk with your banker to find out if there are options to refinance your debt balance. Refinancing could include extending the date or securing more working capital.
A business should also examine if it makes sense to consolidate debt. For instance, those high-interest credit cards often carry interest rates of 18% or more. By consolidating, a business owner can often reduce the interest rate to below 8%.
Review Business Processes
When was the last time you reviewed your business processes? Businesses often add more and more to their business requirements and processes over time. As a result, they get bloated and expensive.
How have the business requirements evolved since you last redesigned the process? Has the need for specific data has diminished or disappeared? How would you design processes differently today?
When you go through this process, you will often find waste in terms of expenses that are happening but may not be required. You may also find that there are people doing work that is not required, thus their position is not needed.
Take Overdue Personnel Actions
At my former accounting firm, we all knew who the bottom 10% of performers were. However, we kept these people on because we mostly had the work. Now is the time to take action on employees who are not performing. These are often the ones who spend time in the halls, organize office parties, or whose job got drastically easier because of some new technology.
As mentioned above, there are many people in the job market. Now also is a great time to eliminate someone whose salary has gotten bloated and replace them with someone whose salary demands are more in line with the market place.
After dealing with your less-than-busy and over-paid employees, you’ll need to take the personnel action you have most likely been avoiding: terminating the underperformers. Unfortunately, unless an owner is willing to take a significant pay cut themselves, there is no room for underperforming employees.
Ideas to Cut 30%
A business is unlikely to find 30% cost savings by merely looking at incremental savings and headcount alone. For instance, if a restaurant like McDonald’s would cut 30%, they would be eliminating either breakfast or dinner. This is a fundamental change in how one does business.
Talk with your Landlord
Businesses that need to cut 30% don’t need the same amount of space. Either the business isn’t selling as many products, or they aren’t providing the same services. Now is the time to reach out to your landlord to renegotiate your space. Landlords are a lot more willing to work with companies now then they were a few years ago. Faced with the prospect of open space, landlords would rather work to ensure that you stay in business.
Some businesses may have 3 sales employees to cover different areas of the country. Now may be the time to reduce this to two territories and make cuts in your sales department.
If you have two geographical departments responsible for the same things, it may be time to eliminate one. For instance, if you have a marketing manager in Denver and Omaha, it might be time to do all marketing out of one location.
Consider Market Opportunities for Consolidation
Most people needing to make drastic cuts to their business don’t feel like looking around the market to buy a competitor. However, that might be a better answer if you don’t want to reduce or restructure your organization.
Often when buying a competitor, you can find efficiencies between the organization. For instance, you can consolidate the accounting, marketing, and sales. You may also be able to create some economies of scale and reduce other expenses.
There are some great business deals available. Many owners are looking to exit now when faced with the stress of persevering the next 12-18 months. If you are one owner who is confident about the long-term, now may be the time to take advantage of short term conditions.
Don’t Let the Market Dictate your Cost Cuts
Cost-cutting is never fun. However, those businesses that wait and don’t plan will often have the cost-cutting dictated to them. This occurs when a bank, landlord, or key vendor tells them what they need to do to keep the relationship.
A business owner needs to use tools such as budgets, financial statements, and outsrouced CFO services to help them through this process. Start this process now. Don’t worry about making it all the way their initially. Know that by starting the process now, you can reach your goal through an iterative process.
The only thing worse than being forced to implement administrative cost cuts personally is being forced to implement ones you know you will regret in a month. Planning, strategy, and proper assistance can help you come out of this process more robust.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at email@example.com.