UK: SME/PROFESSIONAL COUNSEL. - FOCUS ON FAT NOT MUSCLE. Knowing which costs to cut and which to leave alone is the key.

Last Updated: 31 Aug 2010

FOCUS ON FAT NOT MUSCLE. Knowing which costs to cut and which to leave alone is the key.

It is often the knee-jerk reaction of small businesses to cut costs as soon as demand slackens but this is usually the worst thing they can do. Too many cut costs with no regard to the knock-on effect to their customers or products. Instead, managers need to focus on those costs that do not add value to their client relationships. They should set minimum cost-reduction targets and agree a timescale.

There is no point in bothering with micro-level, incremental savings.

It is significant costs that are really worth the time and effort to change.

The following may be a good place to start.

- Material costs: investigate buying materials more cheaply. Consider alternative suppliers but not at the expense of product quality. Can current quantities of materials be used more efficiently? This may require product re-engineering and so is not usually a quick fix.

- Labour costs: a flatter management structure can often bring tighter controls, more staff commitment and a more motivated team. Freezing recruitment and encouraging early retirement are two ways of reducing human resource costs but encouraging 'natural wastage' can often create problems, as good people are just as likely to leave as under-performers.

- Overheads: manufacturing overheads can be cut by reducing the scale of activities but marketing and distribution costs are often an easier and more measurable area to cut back. Advertising and promotion may be ineffective because it is spread too thinly over too many products. Service costs such as warehousing and distribution are other significant overheads that can often be reduced without lowering service levels.

Knowing which costs to cut and which areas of the business to leave alone is the key. Effective cost reduction increases profitability without harming customer service and quality.

Keith Anderson is a partner at Pricewaterhouse Coopers

0121 265 5000.


Mediation is a faster, cheaper way to solve disputes.

Small businesses faced with a dispute that ends up in the law courts are often surprised by the expense and time involved in pursuing or defending the claim. All this causes uncertainty and the legal profession is conscious of criticisms of the system. Reforms are now being implemented to make litigation more efficient and cost effective, which includes alternative dispute resolution (ADR), a way to settle disputes out of court.

Parties to an action in the law courts are now required to consider using ADR as an alternative way of resolving a dispute. Mediation is the most common ADR technique. This introduces a suitable neutral mediator to the dispute, who will listen to each party's case and consider their key documentary evidence.

Mediation takes place in a 'without prejudice' mediation session, which lasts one or two days. The mediator will have a series of confidential sessions with each of the parties to discuss the strengths and weaknesses of their respective cases, and their objectives in resolving the dispute. The mediator cannot impose a decision and parties can walk away from ADR at any time before agreement is reached. Where agreement is reached (statistically, in about 90% of cases), the parties record this in writing and sign it, so creating a binding contract.

ADR is particularly attractive to small businesses as it is speedy, relatively inexpensive and, most importantly, enables parties to continue their commercial relationships after (and during) the resolution of the dispute. The largest provider of ADR services in the UK is the Centre for Dispute Resolution, which can be contacted on 0171 600 0500.

John Hull is a litigation partner at solicitors Richards Butler

0171 247 6555


Waive the annual bonus and pay it into the pension fund instead

If you operate an occupational pension scheme for your employees and are also in the habit of paying out an annual staff bonus, you could help them to maximise their pension contributions by setting up a bonus waiver scheme.

Under a bonus waiver scheme, staff can waive their right to some or all of their bonus. Their employer then pays an equivalent amount into their pension fund. There is no cost to the employer and maximum benefit to employees.

A 40% tax payer who receives a £5,000 cash bonus will actually only clear £3,000 after tax, for example. The employer will also have to pay national insurance of 10% (or £500). If the bonus is paid as a contribution to the pension fund, however, the employee's fund is boosted by the full £5,000 and the employer no longer needs to pay national insurance.

It is important that small business owners seek professional financial advice before setting up a bonus waiver scheme as there are a number of potential pitfalls. Tax relief will be refused if the scheme is not set up in the right way. Employees must write a letter to the employer, confirming their wish to waive entitlement to their bonus. This must be carefully worded to make it clear to the Inland Revenue that the waiver is genuinely for pension provision and not merely to avoid tax. The amount waived, which must be discretionary, has to be decided before the bonus in known.

David Bird is business manager of R K Harrison Financial

0171 929 9300


Listen to your customers and tailor your web site accordingly

A good web site need not cost the earth but small businesses cannot cut corners by simply buying software off the shelf. If they do, they will be disappointed. A web presence is about providing a high quality service that can generate real dialogue with your target audience. It offers a 'shop window' for your company, which should reflect your brand values. How your brand survives on the internet is about much more than just the design. It depends on how users interact with the content, how they navigate around the site and their experience generally.

There is a huge internet community, so defining the target audience and structuring a site to fit customer needs is vital. A web site should never strive to be all things to all people. The content, not the technology, should drive the web site and it is important to tailor content to the medium.

The internet is a great forum for interaction and this should be exploited.

Again, this is where brand values come into play. Entering into dialogue with the user can give a business useful customer information, which should be fed into the design and help to update the site. In order to get the most out of the investment, a web presence needs a rolling programme of content management and update. Evaluation is crucial to the ongoing management of the site.

Caroline Alexander is the multimedia manager at the Design Council

0171 420 5200


Tips to deal with aggressive hecklers or impossible questions

Business presentations are always nerve-wracking, but what should a manager do when faced with a hostile audience, an aggressive heckler or an impossible question?

Know your audience: by researching your audience, you can tailor your presentation to avoid or defuse contentious issues. For a private briefing or pitch, it should be easy to source a list of attendees. At a public conference, organisers can usually provide a list of delegates. Trade journals, company reports and even guides such as Who's Who will aid research.

Avoid jargon: using incomprehensible jargon is disastrous, as is patronising audiences with unnecessary explanations. Simple, everyday language is always best. Practise giving the presentation to colleagues or friends to test its impact.

Don't get flustered by aggressive audiences: if someone challenges your presentation, answer the question but don't allow a dialogue to develop.

Try not to be rude. Instead, respond briefly to the point raised, then politely make it clear that the discussion is closed by physically turning to another part of the audience and carrying on without a break.

Don't avoid difficult questions: there are questions you don't want to answer and those you can't answer. In the case of the latter, don't try to fudge it. Confess that you don't have the information to hand but offer to find out the answer and respond promptly after the presentation. If it is not your specialist area but a colleague is present who could easily answer the question, pass it on to them. If you don't want to answer a question, explain politely that you don't intend to do so, adding a softening phrase to keep the audience on your side, such as, 'I fully understand why it is that you are interested in this but I'm sure you can appreciate how useful that information would also be to our competitors'.

Khalid Aziz is chairman of the Aziz Corporation

0171 329 0225


Fires are expensive. Preventing them is simple and cheap

How many small businesses are safe from fire? According to a Fire Protection Association (FPA) figures, major fires originating in UK office premises cost British business nearly £15 million in 1997 - a disturbing figure when you consider that protecting premises is relatively simple.

Employers have a responsibility to make their workplaces safe from fire under the Fire Precautions (Workplace) Regulations 1997. These state that a fire risk assessment must be carried out, either as part of the overall health and safety review or separately. Fire detection equipment must be able to detect the fire in a reasonable time and give sufficient warning to all personnel.

Those in the building must be aware of what they should do if there is a fire. Reasonable fire-fighting equipment must be provided and all safety equipment should be regularly checked and maintained.

Most of these items are taken care of within normal health and safety inspections, but it is always worth checking your existing fire safety measures. A fire risk assessment of most premises is straightforward and does not have to be undertaken by an expert. There are two main requirements: identifying hazards and individuals who are particularly at risk. Guidance documents are available from the FPA to help. If there are five or more employees, a record of the assessment must be kept. Employers must be aware of any personnel, including contractors, temps or employees, or visitors with special needs, who may use the premises, so that they can ensure their safety in the event of a fire.

The FPA can provide a one-day course in fire-fighting and fire prevention, as can most local fire brigades. There is no point in losing your business or putting your employees in jeopardy because of fire.

If you have a question you would like one of our experts to address, write to: SME, 174 Hammersmith Road, London W6 7JP

Adair Lewis is technical manager at the Fire Protection Association 0181 207 2345.

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