Surface Ripples

Cost Cutting

With the current economic situation, people are cutting costs to increase productivity or competitiveness, increase profitability or just to stay in business.

In many cases, the highest cost of an organisation is salaries and any related taxes (Employers’ National Insurance Contributions in the UK, for example).

When it comes to cutting costs of any sort, painful decisions are needed. However, these decisions need to be based on a balance of what is good for the business as well as what is good for the “bottom line” or for shareholders. Some costs are necessary to bring in the revenues that keep the business alive. If you can’t keep it alive, you might as well close down anyway.

You need to understand which costs add value to a business. Which costs result directly in new sales or revenue, preserving sales or revenues or in maintaining efficiency? If a business relies on sales, does it cut its sales force? Surely not (unless the problem is definitely with the sales force). The comparison is “Profit Centre” versus “Cost Centre”.

It may sound nasty, but if a business is “up against it”, the first costs to cut are those that don’t directly contribute to sales growth, retention of business or to efficiency of operations. Often, though, it’s the Sales or the Customer Service teams who are cut first because “if we’re selling less, we don’t need as many highly-paid sales people or Customer Service staff”. You end up with the proverbial tail wagging the proverbial dog. A reduced number of revenue-earners or keepers end up supporting the same number of “cost centres” and profitability and productivity fall. This translates to dissatisfied customers, sales drop, and the cycle continues.

If anything, Sales and Customer Service Teams should be maintained to ensure that customer opportunities, communication and service are kept at the highest levels. Cut those who aren’t pulling their weight, by all means. You can’t carry any excess fat.

Other staff may have strong relationships with your biggest buyers (they may be the only reason that buyer deals with you). If they go, so may the business that they look after (straight into the arms of a competitor).

Some may be highly efficient at chasing debts, or at making sure that production meets deadlines. Who are they? You should know. If you don’t, others do (including your customers).

You need to know how and where to cut costs in hard times, but all too often, this is left to chance, by which time it’s too late. Have your strategy ready before this happens.

Labels: Crisis Management, Financial, Strategy

posted by William Martin @ 21:55