COMING UP FAST: A SECTION FOR ENTREPRENEURS - Crash Course - The correct way to cut costs

COMING UP FAST: A SECTION FOR ENTREPRENEURS - Crash Course - The correct way to cut costs - There's a chill wind blowing through your sector and you're feeling the icy blast. After years of growth, it's time to make some cuts. But where do you start?

by ALEXANDER GARRETT
Last Updated: 31 Aug 2010

There's a chill wind blowing through your sector and you're feeling the icy blast. After years of growth, it's time to make some cuts. But where do you start?

ACT EARLY. Try to anticipate any downturn and take early preventive action, says Chris Grove, head of the business strategy unit at BDO Stoy Hayward. 'That way, you can manage the impact on your business rather than be forced into knee-jerk reactions.'

CUT DEEP. The deeper you cut at the outset, the better the chance you won't have to repeat it, according to David Wilkinson, national head of enterprise services at Ernst & Young. 'Don't nibble, because if you do you'll probably have to take out more in the end,' he says. A decisive redundancy move, for example, may reduce uncertainty among remaining staff and hasten your return to expansion mode.

UNDERSTAND THE CAUSES. 'A lot of SMEs regard cost-cutting as a quick-fix solution,' says Grove. 'But they risk not addressing the underlying problem - attacking the symptoms rather than the causes.' A cost-cutting programme should be just part of an overall business strategy.

IDENTIFY YOUR VALUE CREATORS. These are the people you cannot afford to lose. Their needs should be taken seriously when you decide whether to make cuts.

BALANCE SHORT AND LONG TERM. Carry out a cost/benefit analysis of potential cost-cutting areas. But don't look at just the short-term benefits. Areas such as sales and marketing, training, research and development and capital expenditure are among the easiest in which to make a short-term gain, but cutting these could damage the business in the long term.

THINK AGAIN. A downturn could provide an opportunity to re-think some of the fundamentals, says Wilkinson. 'If you simply set a target for cost-savings then you'll stop once you've achieved it. So it's better to look for innovative ideas that will change the whole cost-base of the company.'

COMMUNICATE. If people understand why you're making costs, they are more likely to support you. You should also get your bank on-side early on, says Grove. 'Some cuts may cost you in the short term - for example, making redundancy payments. Alert your bank manager as early as possible and explain what you're doing. Most are being very supportive in the present climate, but the worst thing is to give them last-minute bad news.'

PROTECT MORALE. Revoking bonuses, axing first-class travel and closing the cafeteria may seem more palatable measures than making redundancies. But if they leave your staff feeling demoralised and cheated, it's kinder to reduce the headcount.

OUTSOURCE. In a downturn, it's vital to concentrate on the areas in which your business adds value. Now could be the ideal time to consider outsourcing some of the non-core support functions within the business. As well as making savings, you could put your cost-base on a more flexible footing.

EXPAND TO CONTRACT. 'One way to cut costs is to spread them over a wider business,' says Wilkinson. 'This is a good time to make an acquisition, because borrowing is cheap and prices are down.'

LET NOTHING BE SACROSANCT. Some costs are difficult to cut: property is a good example because landlords are resistant to letting you wriggle out of your lease. But they might have just had a better offer.

DO SAY: 'By taking this prompt action, we'll put the business on a sound footing to take advantage when the upturn comes.'

DON'T SAY: 'I've just seen last quarter's figures and sales fell off a cliff. Stop all expenses, cancel the bonuses and pull the advertising campaign. Cut everything or we're done for.'

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