How to Approach Cost Cutting with Long-Term Value in Mind

A guest post from our colleagues at CFO Selections:

When adversity hits, the knee jerk reaction is to swiftly cut spending across the entire organization, but that response is a mistake.

Strategic cost cutting can keep a business going through tough times, but it must be approached with long-term value in mind. Reducing costs should abide by three essential principals:

1. Do not cut anything that is required to sustain daily business operations
2. Do not cut costs anywhere where the long-term effects will outweigh the short-term benefits
3. Do not cut anything that will cost more to replace later

​Evaluate your spending and determine where you can cut costs to weather tough times while still protecting critical functions, minimizing long-term expenses, spending where it could end up costing more not to do so, and looking for opportunities to reduce waste. 

---

Maintain Critical Spending
Marketing and other professional services are often the first to go, but a Harvard Business Review article explains that this is an ill-advised plan:

Marketing expenditures in areas from communications to research are often slashed across the board—but such indiscriminate cost cutting is a mistake. Although it’s wise to contain costs, failing to support brands or examine core customers’ changing needs can jeopardize performance over the long term. Companies that put customer needs under the microscope, take a scalpel rather than a cleaver to the marketing budget, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely than others to flourish.

The same is true for all other outsourced activities as well. Careful cost savings measures will always yield better results than rashly responding to a sales slump, market disruption, or widescale economic downturn. Stephanie Brock echoes this sentiment when she says,

One common mistake is to immediately take the scythe to marketing spend rather than viewing marketing as a revenue-generating arm of the business. Scaling back on marketing activities may deliver a quick win for budget reduction but slow or halt fueling the pipeline for future sales and growth… Take a look at what functions are undeniably necessary to accomplish the primary purpose of a department and only cut what absolutely does not impact today’s and tomorrow’s growth.

Continue spending money on the functions you will always need no matter what your business volume looks like – areas such as marketing, sales, customer service, and accounting. Reduce or eliminate spending on things that are not required during a market downturn or sales slump – areas like travel expenses, employee perks, or equipment upgrades.
​
Minimize Long-Term Costs
Some cuts will temporarily reduce spending now but increase it disproportionally later. Before reducing costs in any area, analyze how much it will cost to replace this spending after the business has rebounded.

For instance, human resources-related expenses tend to be more costly across the long-term. If staff is laid off or furloughed, the cost of rehiring and training new staff later is typically higher than if staff had been retained all along. This is especially true when you consider how disruptive layoffs are to current business operations, the strain they put on employee productivity, the burnout they can cause among your best employees that remain, and the subsequent public brand damage that can be done as a result. When personnel cuts need to be made, aim to minimize brand damage by doing them as ethically and responsibly as possible.

Technology budget cuts can be just as costly down the road. Do not cut finding for technology like CRM systems and bookkeeping software. Anything that automates or streamlines processes that would otherwise need to be done manually, should be retained. These types of cuts can subsequently result in higher costs when processes must then be handled manually, requiring a significant increase in labor hours.

Spend Where You Cannot Afford Not To
Do not cut corners on bookkeeping and accounting activities because the financial and legal penalties you can incur when these functions are done incorrectly will always outweigh their expense. Furthermore, retain enough finance-related employees to ensure separation of duties no matter where those employees are located. If cost cutting is due to a widespread downturn in the market, financial controls are even more important because data shows that internal business fraud increases during economic recessions.

Additionally, continue paying compliance and regulatory costs. Never put your employees or customers in danger by sacrificing their safety. Do not make any spending cuts that will risk your physical or cyber security because a data breech or cyberattack can be extremely damaging.

Reduce Waste
Sometimes you do not need to cut costs at all. Instead, you can just eliminate waste.

Align your daily business operations with waste reduction in mind. Evaluate manufacturing and production schedules to ensure equipment is running efficiently to reduce operation costs. Take a green approach to reduce heating, cooling, and electricity waste as well. Power down machinery and office technology when not in use and go paperless to reduce office expenses.

Evaluate your ongoing spending to find opportunities for scaling back your spending. Contact vendors to determine if plans for telecommunications, IT support, cloud storage, ecommerce functionality, drop shipping, and so on are in line with your most essential needs. Downgrade plans where you are paying for features or functionality that you do not absolutely need.
​
Lean on your CFO or an experienced third-party accountant to analyze where your business can afford to reduce spending without hurting long-term growth potential. 
​
About the Author:

CFO Selections provides finance and accounting interim consulting and executive search services to a wide range of organizations in the Northwest. Established in 2002, the company focuses on locating and recruiting the highest caliber senior-level talent available. Its team of consulting CFOs and Controllers work in a collaborative and problem-solving way to generate maximum results.

---