Insolvencies are up, the news pages are filled with stories of businesses firing workers and many small businesses are feeling the pressure.
When you’re being squeezed by the banks and the debt cloud is getting stormy, it can be hard to know where to begin. But making cost-cutting decisions hastily, without proper consideration, can be dangerous.
SmartCompany caught up with savings experts Gavan Ord, business policy advisor from CPA, Mike Sewell, director of Market Gap Investments, Michael Reid, founder of SME Savings, Courtney Clowes, director at Knowledge Equity, and Jan Barned, principal of Financial Management Trainer and had a chat about the best ways to save and how to avoid lethal cost-cutting mistakes.
Financial analytics are vital to the health of a small business and Ord says business owners need to consider the risks and benefits of cost-cutting tactics before acting.
“They have this directive to cut cost, but businesses of all sizes and governments make this mistake. They just say cut here, without thinking about how they should cut, where they should cut, where they should actually spend money and what the consequences of cutting are. Businesses do a cost-benefit analysis of spending, but they don’t do a cost-benefit analysis of cutting and they should.
“In terms of things which could be done requiring less analysis, the owner could say ‘bring all invoices to me’ for a set amount of time so he can question, why are we paying this and that? Bring in everything, concentrate on it all for a short period of time and then start to ask questions. Business owners need to have an inquiring mind,” he says.
Ord says it’s crucial to understand where the money is being spent.
“If you’re struggling and you’re the business owner you actually really need to understand where the expenses are coming from. Go through the financials, look at your costs and question. Then go to your suppliers and ask for discounts or for extended payment terms – or cut them all together. But make sure you understand the consequences,” he says.
Sewell says most small businesses have latent costs which they don’t even notice. He references a fabric manufacturer: “In manufacturing there is a huge amount of waste which isn’t counted.”
“For example, I was in a fabrication company and there were all these bits of offcuts in a corner and I asked ‘how much of that is rework and how much is scrap?’ and they said ‘oh we don’t actually measure that because we sell it’.
“There’s a fundamental flaw in that because some of it is there because someone has made a mistake and therefore it’s unproductive, and some of it is just scrap in the process. But businesses need to look closely at that and measure what is scrap and what is part of their error systems to know what’s losing them money,” he says.
Clowes says cost-cutting should “generally be theoretical” since businesses should have plans in place from the outset of how to cut costs if business drops.
“It’s generally theoretical, but if you wait till it’s an emergency to cut costs you’ll make a mistake. You’ll cut discretionary costs – marketing, casual labour, training of staff. You cut it because it’s the only thing you can and you end up cutting off your nose.
“Cost-cutting needs a lot more discipline and planning in advance. It needs to be targeting things like rental agreements and retailers should consider things like shrinking their inventory in order to take up less warehouse space and save on rent,” he says.
Clowes says smart spending can only take place when appropriate safety buffers are in place.
“When times are good, go to the bank, extend loans and collect debt. You really need to plan for the bad times. Consider scenarios – what if this happens and what would our strategy be? For example, if a new competitor comes along and sales drop 20%, or equally if they grow 20% – what would you do?
“We had clients before the financial crisis that said there was no way the market will fall and now look what happened,” he says.
Barned says one of the big issues for SMEs when they begin is just “going with the flow” in terms of their operational procedures.
“Because of their tight resources they don’t actually look at their processes, but they need to have a good look at their business processes. For example, you may start with an overdraft account incurring interest costs, but a business may not need it or it might be able to reduce its interest rates,” she says.
Firing staff is one of the first things small businesses do to cut costs, but SmartCompany’s experts say this is one of the biggest mistakes.
Ord says cutting staff can have long-term consequences.
“People cutting staff are thinking about the short term and not the medium to long-term consequences. When they realise their mistake, they must then recruit someone new or train someone up and these things cost money. There’s an old saying, penny wise pound foolish – you might save some pennies here, but it costs you more in the long run,” he says.
Sewell believes businesses should hold tight to their good staff members.
“If you’ve got good staff, don’t lose them! Create work and if they’re good staff give them some leeway to create their own work because you really don’t want to lose them.”
He referenced a personal example saying it took him eight months to train new staff after firing others from his own business and realising he actually still needed them.
Barned says businesses need to have a balance between keeping staff and flexible staffing arrangements.
“Have a look at staffing arrangements have a balance between flexible staffing arrangements and keeping your good staff. You need to have the ability to have staff that are on call, but have good arrangements in place for your good staff so you don’t lose them,” she says.
Reid says while it’s important not to cut jobs, some things can be outsourced to ensure they are done well and cheaply.
“Businesses realise six months after cutting staff, ‘oh no, I need someone to do that’, so they put someone back on who is untrained and they’ve lost the corporate memory.
“It’s very important not to cut jobs without consideration, but because many small businesses are time poor you can outsource things like social media. Pay someone to do it and make sure you use a marketing or PR professional. You can find reasonably priced services and you’ll get a better result,” he says.
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