Cut Costs Strategically in the Recession

For all the recovery in stock prices and corporate earnings, a lot of small and mid-size businesses are still in a recession. Ask the experts how long it will last and you’ll hear everything from five or six more months to five or six more years. One thing is certain though: It won’t last forever.

So what do you do with this information? Here are a few ways to avoid some of the common mistakes of past downturns -- and to get a head start on your competition at the same time.

It Starts with Cost Control

Financial strategies for any company in these uncertain times should consider the company’s fundamental strength when it comes to a cost-control program. Across-the-board cost reductions, so common during times like this, are fairly easy to initiate but can be damaging to a company’s foundation in the long term. Instead, consider these guidelines for creating a more effective cost-reduction program.

Focus your staffing reductions on marginal performers throughout your workforce. This is an excellent opportunity to relieve your payroll of underperformers with minimal risk of backlash or legal exposure. If you’ve delayed having a confrontation with these employees or their managers, do it now. (Your potential legal exposure, of course, is based on your individual situation and you should always consult a labor attorney in questionable cases.)

Cut costs in areas that won’t impede your recovery or affect critical current programs. You can cut these costs sharply or eliminate them entirely. Examples include planned enhancements to employee benefit programs (even if announced) and replacement of inefficient equipment that still keeps up with demand. Then initiate efforts that will reduce costs without cutting into capability. A good example is refinancing corporate borrowings at lower current interest rates.

Cut activities that must be retained in the long-term but can be delayed or reduced to an inactive state for six to nine months. For example, you could shelve an accounting system conversion for now, even if the software has been bought and paid for, thus saving thousands of dollars in implementation and training costs. This assumes the prior system isn’t crippled and unworkable in the interim.

Consider investing money in programs that can benefit your cost-control program or add power to your readiness for the recovery. For example, finish the partially completed development of a new product that will be the market leader in a high-demand environment when it ships. Or hire a few outstanding people in critical departments that weren’t previously impacted by layoffs. In other words, feed your winners.

Protection and Preparation

In a nutshell, you want to protect yourself during the downturn while preparing yourself for the recovery. And when that time arrives, you want to be in a position to move out aggressively, take advantage of your weakened competitors, and add market share and profit margin. It’s important to think strategically during these times -- because when the recession is finally over, it’s going to be a very good year.

Gene Siciliano is an author, a speaker, and financial consultant who works with chief executive officers and managers to achieve greater financial success in a changing economy. His new book, Financial Mastery for the Career Teacher, is scheduled for publication in spring 2010.