Cutting Business Costs in a Recession

A rising tide raises all ships. Sadly when the tide goes out, all ships change directions and head downward. No business is immune to the effects of a recession, but some businesses and industries experience disproportionably negative effects.

Costs creep into a business when you're not looking. That's why it's beneficial to review all elements of cost at any time but there's nothing quite like a recession to create a special sense of urgency. One dollar of reduced costs can replace up to $10 of lost sales. The basic objective of a cost reduction program is to make certain that each dollar of spending furthers the company's mission in providing customer value or efficiently employs people to achieve goals that really matter.

For maximum results there's one rule for cutting costs. Eliminate, reduce or shave all costs of doing business. A few areas are exempt from elimination:

• Costs that directly impact revenue
  
• Costs that directly add to productivity
  
• Costs that are required by law

Many businesses will hire an accountant to help them know what each category an expense fits into. This specialty is called a cost accountant and they help the business better assign expenses to revenue. This lets the business owner know where to cut the deepest with the least impact on revenue.

The focus of a cost reduction program where the greatest impacts are possible can be determined by listing every cost element in order of their percentage of sales. The largest and highest ranked cost elements determine where effort will have the highest return. Here are some proven cost reduction tactics:

1. Obtain quotations from three suppliers of each item and use the quotations to drive costs down. The arrival of a recession signals perfect timing for this tactic. That's because a recession is an environment where most businesses lose some customers or where many customers buy less. Suppliers become anxious, insecure, and highly motivated to replace lost business and to defend against the loss of good customers.
   
   To maximize cost reductions, aggressiveness is mandatory. If you don't ask your suppliers for better prices, you'll never see the potential for great results.
   
   
2. Staffing and compensation should be reviewed using Paretos Law. This law indicates that 20% of people contribute 80% of revenue and profit. After these positions are identified questions naturally arise about the remaining 80% of people. Particularly if sales are declining this approach provides a starting point for combining tasks and eliminating a number of positions.
   
3. Remaining cost elements can be reduced or eliminated. If they can't be eliminated, they can be shaved from 5% to 25%. It all adds up. Business is truly made up of nickels, dimes, and pennies.
   

Cost reduction programs are only one way to improve profitability. Increasing sales, focusing on sales mix, finding better methods for performing a task, analyzing "make or buy" decisions in a world economy, pricing decisions, and even merger and acquisition decisions are just a few other techniques that can enhance profitability.