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The internet, consultants, and experienced finance/accounting professionals offer hundreds, if not; thousands of solutions for companies that need to cut expenses to meet their financial objectives.
Cost-savings for any type of company should start with a grass roots analysis to identify where and how much savings might be available. This will require thorough and detailed analysis of every line item on the financials. This is a common sense approach but one that requires due diligence and proper execution.
The following is a sample of some short and long-term opportunities to reducing expenses:
Short-term
Headcount
The natural instinct by most companies is to pare down salaries by reducing their headcount. Many organizations should rank order their employees from most to least expensive and assign a performance rating to help determine the layoffs necessary to narrow the budget gap.
It’s essential for companies to evaluate the talent and productivity of their employees on a regular basis. This analysis would allow employers, who must cut payroll, to make a more informed and accurate business decision.
- FT to PT – reduce obligation of full-time salary/benefits by electing to hire PT staff and/or contractors.
- The dreaded Hiring freeze
- Job-share
- Company-wide salary reduction
Benefits
Companies could elect to reduce their financial commitment to employee benefits. When faced with this decision companies might be able to avoid reduction in headcount but could have long-term consequences specific to turnover.
401K
Eliminating existing company contribution
Merit increases
Freezing or suspending merit increases to reduce budget deficit
Debt Obligation
Refinance debt to reduce interest payments
Leases
Renegotiate leases to reduce short-term exposure
Service Providers
Review of all contracts to determine the exposure to vendors. Keeping the length of contracts to a maximum of 2-3 years or 2 years with an option would provide employers with opportunities for cost savings and flexibility in negotiation. Companies have significant leverage in today’s economy to negotiate favorable contracts.
- Office supplies
- Shipping
- Marketing
- Advertising
- Utilities
- Insurance
- Cleaning/Janitorial
Long-term
Technology
Pursue opportunities to invest in technology to gain efficiencies and lower costs.
Turnover rate
There is a direct correlation between the turnover rate and corporate culture. The most successful companies make a concerted effort to focus on employee retention. A stable and productive workforce will reduce the incremental cost of training.
Restructure
Divesting or consolidation underperforming business units or programs that operate as a loss leader.
Strategic Plan
Development of 3-5 year strategic plan that would include detailed pro-forma analysis to support the business model.
Brainstorming
Collaboration with management team to identify creative solutions to resolve cash flow issues.
Pitfalls
There are risk factors to consider when making decisions to cut expenses:
Reducing headcount without consideration of performance
As outlined earlier, the decision to target employees based solely on pay scale would result in a more inefficient operation. The proverbial “addition by subtraction” is in play here. Identifying and parting ways with the most underperforming employees is the most practical and logical target if reducing headcount is essential in meeting the company’s financial goals.
There could be an adverse affect on morale and productivity if the company elects to retain underperforming employees. The employer must consider the human capital as assets of the company and not just a line-item expense.
Inaccurate analysis
Business decisions will be made based on financial analysis. Consensus at the highest level is paramount to effectively execute cost cutting initiatives.
Poor execution
Proper execution is mission critical to any company, business unit, or franchise. The one caveat would be if the business model does not allow the company to achieve success that is sustainable.
There are many variables that will drive key business decisions including but not limited to the following:
- Industry
- Corporate Culture
- Budget gap
- Size of company
- Location
- Competitive landscape
- Economic Climate
- Other
Conclusion
The objective is to help jump start the process of identifying and implementing cost cutting initiatives. The circumstances that necessitate companies to cut costs vary on many levels. The common denominator to ensuring a successful outcome is thorough analysis coupled with proper execution.
Eric Silberzweig is an accomplished and dynamic leader with strong core financial skills and progressive management experience in education, financial services, and the software industry. He has a diverse background with over twenty years of broad experience in finance, accounting, management, and operations having held positions as Director of Financial Planning & Analysis at ACI Worldwide, Director of Finance & Administration at American Career Institute, Director of Administrative & Financial Services at Education Management Corporation, Senior Project Manager at Mellon Financial Corporation, and International Finance Manager at Russell/Mellon Analytical Services. Collaborative and proactive leadership qualities with particular expertise in the following key areas: Financial Planning & Analysis, Budgeting/Forecasting, Financial Modeling, Strategic Business Planning, SOX compliance, Board reporting, accounting, management reporting, contract affairs, grant management, and Process improvement. Silberzweig has managed budgets ranging from $2M to $200M. He is a member of a senior management team and on the Executive Committees of two organizations. He completed an MBA from Boston University in 1998.
He can be reached by email at
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