Saturday August 18, 2012
How to cut costs
By EUGENE MAHALINGAM
When economic conditions are less favourable and profit margins become strained, businesses are forced to find ways to cut costs in order to continue operating efficiently.
Cutting cost can range from making tiny tweaks to your daily operations to major changes that could have a significant impact to a business and its various stakeholders.
The following are some of the ways to cut cost in a business.
Efficient cash management
When business operations get strained, then prepare to modify your cash management style to keep margins at reasonable levels.
“In today's economic times, it's critical to do more with less. You need to wring every drop of value from existing investments and scrutinise every new investment,” says Peoplelogy group founder and chief executive officer Allen Lee Chin Min.
He says companies should still be able to maximise profits, control liquidity and minimise risks.
“Successfully managing cash is an essential skill (especially) for small business developers because they typically have less access to affordable credit and have a significant amount of upfront cost that they need to manage while waiting for receivables.
“Wisely managing cash enables a company to meet unexpected expenses, in addition to handling regularly-occurring events, like the employees' payroll.
He adds that companies need to know when to collect cash, how to manage it and when to invest it.
“Companies should balance between accounts receivable and payable in order to avoid insolvency and bankruptcy. Reducing days in accounts receivable is one of the good ways to collect more cash in a short period of time.”
Besides reducing dates on accounts receivable, Lee says increasing collection rates are also crucial for companies.
“It's much safer to have cash in your pocket rather than in our clients' ones. Once you have additional cashflow in the business accounts, you can use the cash for investment purposes.”
Jacob Rajah, a printing press owner, says when times got tough, he rented out vacant lots on his premises to earn extra income.
“We had some empty rooms in the building that we owned and rented them out to tiny business operators. It helped to supplement our income,” he says.
Marketing costs reduce or increase?
When finances are strained, should you still allocate the same amount of budget for your advertising and promotional (A&P) campaigns?
“Careful consideration must be given on the impact of a product, brand or business when cutting down on A&P costs. It may have a long-term negative impact in some situations,” says Deloitte Malaysia country managing partner Tan Theng Hooi.
“Normally, the level of A&P activities has a direct positive impact on revenue if it is done correctly,” he adds.
Lee points out that the first thing most companies do (when business conditions turn unfavourable) is to reduce cost in advertising.
“They cut cost as they do not see any results immediately. But not all advertising cost should be reduced. I would advise that a set of measurements should be implemented for all marketing activities that is done. Each marketing activity should be done based on an objective.”
He adds that A&P that brings the most benefit to the company, whether in long or short term, should not be reduced.
“Campaigns that don't perform according to the company's objectives, or if consumers have responded poorly to it, can be cut or eliminated. But one needs to bear in mind that each marketing channel or A&P campaign varies depending on the industry.”
Often, when a company's revenue gets hit, it's quite common for that organisation to consolidate its various divisions to “cut out” the units that aren't making money.
Jenson Lam, a senior executive with a local automotive company, says he was forced to consolidate his various sales units when the Asian financial crisis hit in the late 1990s.
“We had three divisions and had to consolidate into one unit. I was tasked with the (difficult) decision to retain the people I needed the most and cut out the rest.”
Lam recalls it being a very tough decision to make.
“People's livelihoods were at stake. It was difficult. However, while we did decide to “let go” a few people, I tried my level best to keep as many as I could. We reduced the salaries of the ones we retained.”
Michael Chan, an executive with a local advertising company, says he opposes the idea of consolidation, especially if the unit in question had good growth potential.
“In tough times, we just shut down the unit temporarily and moved the people to other divisions. When things got better, we reopened that division and sent the people back there.
“That is why it's important to get employees who can multi-task. In tough times, we don't have to sack our staff and can instead relocate our people to perform other functions.”
Cutting down on your employees is never an easy decision to make and should only be done when all other options have been explored exhautively, says Lee.
“For most companies, the last cuts that they want to make is to their staff. Sometimes they do not have a choice, but often there are options to reduce employment cost without having to resort to redundancies.
“If companies need to save money, they could consider recruitment freezes, overtime management and workforce optimisation by leveraging into technologies. Avoiding redundancies means you do not impact your employees' morale, which could result in key people leaving and a fall in productivity,” he says.
Tan meanwhile feels that staff reduction, especially when there is an excess of resources, is a natural business decision.
“But caution should be exercised because there are termination costs and it is expensive to hire skilled workers. There is also cost in training new staff when demand picks up again and the enterprise may lose its competitive edge when new workers may not immediately meet the needs of the business.
“Most businesses retrench to manage the pressure on earnings or as a last resort for survival reasons,” he says.
Cutting bonuses - should you?
Lee feels that this should never be an option if the company is making profits.
“As an employee, they always look forward to receiving bonuses by the end of the year to measure their level of recognition.