When the times are good, most businesses focus on increasing revenues and market share, however, when the inevitable slowdown occurs, the focus needs to change. Faced with tough choices on how to best protect the company, most management team tends to look inward and examine their business processes. While some do not want to make changes because they think that the bad times will pass soon, others go overboard in slashing costs. The really smart ones, however, try to figure out how to use the recession to their advantage and make their businesses more effective so that they can move nimbly and overtake the competition when the economy improves. Some effective strategies used by smart business managers to make their businesses recession-proof:
Track and Control Spending on Non-Payroll Items
While most businesses monitor closely their expenditures on salaries and wages, they generally fail to keep a close watch on expenses on other heads relying only on month-end reports to find out how much they have spent. However, this kind of reporting can often lead to nasty surprises long after the event. One of the most practical ways of ensuring that your business is protected against the sudden impact of a recession is to monitor non-payroll expenses more closely and desist from unnecessary spending on all items. The closer oversight also encourages employees down the line to curb their tendencies to indulge in excessive spending and exercise more prudence and discipline on their spending habits. It can be very helpful to revamp company policies regarding who is allowed to spend and up to what limit. With the checks and balances brought about by the hierarchy of signing authorities, it becomes easier for the business to prevent wasteful spending and increase the focus on effective and necessary spending.
Engage in More Efficient Budgetary Planning and Enforcement
Budgeting is not unfamiliar to most businesses; however, proper enforcement of the budget is usually neglected in most organizations with a large number of justifications and excuses coming into play to account for the deviances. Budget management also typically tends to suffer from the practice of “budget flushing” where managers try to ensure that the next year’s budget is preserved by rushing to spend everything in the current year budget even though there is no real need for incurring the expenses. According to business finance experts, when the economic climate is tough, such wasteful actions can be very costly, observes Michael Giannulis.
The situation is even more disastrous when there is no budget at all because then employees can very easily rationalize more costly purchases without examining the opportunity cost of the funds. If you have not been creating budgets for your business, the best way to make a beginning is to review all non-payroll expenses over 12 months and classify them into buckets. You should establish monitoring and accounting processes for each of the buckets after allowing for adjustments due to operational demands within a bucket. Dividing the annual budget into quarters is usually a good idea to make evaluations and corrections more effective. You may be surprised to find no damage results even by slashing budgets of some buckets by 20-25%.
Identify and Limit Non-Essential Spending – A View All Experts Endorse Observes Michael Giannulis
When the times are good, it is natural for certain inefficiencies to creep into your business simply because you can afford them, and they do not hurt badly. However, during a recession, it is these same inefficiencies that may be responsible for the business to go down. The first thing business owners need to do during a recession is to defer purchases that are strictly not necessary. Putting off purchases of office furniture or upgrading computer hardware or software, for example, can easily save a lot of money that can be fruitfully deployed elsewhere for generating more business.
Another move that can effectively save money is curtailing employee benefits, though; it needs to be done sensitively to prevent loss of morale. While paying employees fair wages, treating them well, and providing adequate health insurance are good business practices, you can do well to examine limiting benefits like club memberships, entertainment allowance, subsidies for commuting or acquiring fresh skills, and even cutting back on refreshments on the job can save you a pile of money. Take into account the total cost of ownership, not just the price of the purchase of various products and services. For example, if the energy audit reveals a very high recurring cost of power due to inefficient HVAC equipment, it may be better to allocate funds to buy more energy-efficient equipment to benefit from the savings.
Streamline Inventory Management
Most businesses, especially the large ones, tend to incur a lot of cost in holding inventory of supplies to prevent disruption in manufacturing. If you find yourself holding excessive stocks, you should examine the need for doing it and find out alternative ways of dealing with it. Many vendors of critical supplies have the capability of feeding you with materials and parts on a just-in-time basis which eliminates your need to maintain inventories that consume both your cash and warehousing space that are better used elsewhere. However, not maintaining inventory can have a downside if there is a disruption in the supply chain due to unforeseen reasons like a pandemic, according to cnbc. Also, try negotiating with your key suppliers for better discounts and credit periods with long-term contracts or by consolidating vendors. Many suppliers have years of experience and can offer valuable advice regarding how to alter manufacturing processes or even expand the product range to cater to market demand.
While it is great to have a consensus on the various methods of streamlining business operations to survive an economic recession, it can be difficult to ensure that the new consciousness percolates to all concerned down the line. While you can always send a never-ending stream of memos via email, perhaps the best way of ensuring that managers do get around to effectively cutting costs is to deploy a cost-cutting tool that will track spending, enforce predefined budgets, restrict non-essential spending, manage inventories better, negotiate better with suppliers using factual information, and boost overall employee productivity.