Managing Costs in a Crisis

All too often when a business is in financial difficulty we hear about jobs being lost as cost cutting measures are implemented. However, whilst reducing costs is an obvious decision to make if margins are suffering, it often does not have the desired effect, with businesses not being able to recover sufficiently.

The obvious might not be the most appropriate

It is not unusual to see businesses looking at making cutbacks in areas which do not directly generate income. Business owners will talk about cutting overheads, so those who have support roles in the business are quite often the first to fall victim to a cost reduction exercise. Other organisations might look at setting different percentages as ideals for certain business aspects, such as payroll costs, and then make cuts to hit the target percentage. Concentrating on overheads is an easy way to reduce costs, but a turnaround of a business is not solely reliant on managing costs effectively.

Understand what you want to achieve

The current pandemic is forcing many businesses to reassess their business model and strategy. Before you embark on a cost-cutting strategy, you need to understand what you envisage your business looking like in the future. Any elements that are key to your vision should be classed as core priorities and any costs associated with those core priorities will need to be managed. If you discover that some of your current business is not aligned to these strategic priorities, then any initial cost reduction process should be concentrated on these areas.

Focus on the strategic direction

Once you know the direction of travel for your business, review the various aspects of the business that are needed to facilitate that strategy working. This should not only focus on the individuals needed for the delivery of the strategy but also those who need to provide the support to ensure that the strategy is delivered in the way it is intended.

It helps you make better decisions

Understanding the strategy for your business can help with your decision-making, especially if you think you will need financial support over the coming months. If you have a plan in place, it will also assist you with any cash requirements or deferrals you might need to make – especially around HMRC arrears and other key suppliers. It will also help you to ascertain whether the Chancellor’s new Job Support Scheme will be worthwhile for your business.

This process can add value even if your business is looking distressed

If you think that your business will struggle to survive without some form of restructuring, then taking time to focus on what exactly you want your business to look like is important. Using a restructuring process can assist with managing debt but it can also help with the costs of adjusting your strategy to make the business more efficient. For example, a retail business might have a number of stores with some that have been loss-making; taking a step back to ascertain whether those stores actually add value and then closing those which are loss-making can build resilience into the business model. Using a restructuring process can help implement those changes in a cost-effective, managed way.

In conclusion

Setting aside time to revisit your strategy will give you some control at a point when there is much uncertainty around. It may be necessary to implement a turnaround strategy if your business has been adversely impacted by the pandemic, so understanding what exactly you want your business to look like will help guide you through the months ahead. By all means, consider reducing costs for non-core elements of the business first however make sure you that you can see the impact on the whole business before implementing that strategy.