The Five Worst Areas of Your Business to Cut Costs

Cost cutting is often the go-to strategy for companies trying to weather economic downturns or other factors that cause a drop in business. If there’s any silver lining to tough times, it’s that companies tighten up their operations and learn how to do more with less. But some owners do more harm than good.

By cutting costs haphazardly or across the board, rather than developing a strategic cost-cutting plan, these “slash and burn” initiatives can severely damage a company’s long-term foundation by crimping sales and undercutting strategic advantages. And once business picks up again, many of these companies are ill-prepared to aggressively add market share and boost profits. Following are five of the worst areas in which to cut costs too agressively:

1. Marketing: This is the first place many owners instinctively look when it’s time to cut costs. However, most experts advise just the opposite: to increase advertising and marketing expenditures, if possible, to get a leg up on competitors who may be pulling back. If increases aren’t possible, at least try to maintain the status quo. At the same time, gauge the effectiveness of your marketing programs and reduce or eliminate spending on those that aren’t generating measurable results. Also look for ways to reduce marketing costs without eliminating entire programs. For example, you could cut the size or frequency of print advertisements.
2. Employees: Laying off employees should usually be a last-resort cost-cutting measure, most experts say. While it will lower costs in the short term, saying goodbye to experienced and productive employees may significantly weaken your company in the long run and limit your ability to take advantage of future growth opportunities. Instead of full-scale layoffs, you could try reducing employees’ work hours, limiting overtime for hourly employees, and asking employees to take a furlough day every month or quarter. Also hold off on filling new or open positions by spreading the work among existing employees. This will make it much easier to ramp your workforce back up to full speed again when things turn around.
3. Retirement plan contributions: Try to maintain company contributions to employees’ retirement plans if at all possible. Eliminating these contributions can have a negative impact on employee morale, not to mention the long-term effect it can have on their future retirement income security. Before eliminating contributions completely, scale them back first if you can, perhaps by 50 percent. Also, your company’s contributions to qualified employee retirement plans are usually tax-deductible, so your out-of-pocket cost of making these contributions probably isn’t as high as it appears at first glance. Be sure to talk to your tax advisor about the specifics of your company’s plan in more detail.
4. Technology: Scrimping on the technology needed to remain competitive in your industry may be the ultimate “pennywise, pound foolish” cost-cutting decision. Failing to adequately upgrade technology and equipment can set you far behind your competitors and seriously hinder your ability to meet your customers’ expectations. For example, as a general rule of thumb, computer hardware should be upgraded approximately every three years, software every four years, and servers every five years. Your technology upgrade window may be a little more or less often than this, depending on your industry and your company’s growth.
5. Tax payments: Federal and state taxes are the last area where you should try to save money. Be sure to make all tax payments on time to avoid penalties, late fees, and interest charges, or worse.