Cutting Back?: 4 Big Steps to Financial Survival

Since businesses in the US and for the most part the rest of the world cannot print money (unlike our government) when it comes to solving cash flow issues, company leadership have to look inward as to what they can do and make the hard decisions to adjust expenses down to meet lower revenue.  In short, they cutback!  The degree and duration of the cut depends upon the anticipated slump in incoming revenue and the reserves available to weather the storm.

Safe Harbor?

Banks are not a safe harbor for a company entering a deficit period – expenses exceeding revenue.  Bankers do not look favorably on a company running up a line of credit when they have deficits as far as the eye can see. When they do not have a clear and immediate path to profitability and a pay back plan, even in the best of times, they would expect the company leadership to take the necessary and unpopular (some would call drastic) steps and implement an austerity program to remain financially viable.

What does a business do to survive?

The following lists examples of cost saving measures that a company may use to drastically cut cost, reduce the size of the business to survive.  These measures are not listed in any specific order and there actual use may vary depending upon the specific circumstances a company might be faced with.

  1. Reduce the size of the organization.
    1. Freeze hiring.
    2. Reduce or cancel professional contract services.
    3. Layoff or furlough surplus staff and line people.
    4. Reduction in payroll expenses: Usually a graduated amount relative to total salary with executives taking more and line personnel less of the burden.
    5. Reduction in hours of some positions to halftime.
    6. Convert some positions to contractors where full time is not necessary and the skill is.
    7. Change in benefits requiring employees to shoulder more of the medical insurance burden.
    8. Consolidation of offices and buildings into fewer locations.
    9. Sale of excess facilities, office equipment and machines, etc.
  2. Reduce the cost of operation.
    1. Renegotiate prices on purchased material or ask other qualified suppliers to bid to displace current supplier.
    2. Drop uncompetitive and unprofitable lines of business.
    3. Outsource non-strategic operations to more cost competitive third parties.
    4. Limit travel and impose travel expense reductions – i.e. cheaper hotels, class of air travel, cars.
    5. Cancel sales agreement with third party sales channel and take sales direct.
  3. Improve cash flow.
    1. Negotiate longer payment terms with suppliers.
    2. Negotiate faster payment terms with customers.
    3. Require down payments or deposits for large sales.
    4. Reevaluate capital projects and cancel those not having an immediate impact on revenue business.
  4. Increase revenue.
    1. Increase prices on captive services.
    2. Charge for previously free services (i.e. training).

Consequences?

Are these easy measures to take?  No!

  • Loosing people who have contributed is hard.
  • Resistance to some of these measures will be stiff but with good follow through and executive communication and presence the organization will adopt the new environment.
  • Relationships with suppliers and third party organizations will be strained but they are business people as well and if approached in a professional and above board manner most (not all) will find a way to make it work – they want to stay in business as well.
  • Employees will find the new work assignments, hours, benefits, employment relationship (reduced hours or possibly contract) difficult at first but will adjust due to consistent/trusted executive communication and presence to focus on the business and the progress toward meeting financial objectives.

Summary

Guiding a company through a major change in size through a tough economic time is a harrowing experience.  There will be all kinds of naysayers to the measures that you have taken, but in the end having used the best minds in your organization, aggressively pursued and endured adopting the necessary measures, regularly communicated with all in the company – meeting many individually; the organization will survive.  You will see who emerges as the true leaders in your organization and those who are truly committed to the success of the organization in the attitude that they apply to their jobs and how they influence others.  No one wants to go through this experience but so many companies emerge stronger and more competitive than they were before!

Please share in the comment section below what measures you took that were successful guiding your company through an economic contraction.

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