In a perfect world, business owners would have plenty of time and energy to regularly review their balance sheets and analyze expenses, cutting unnecessary spending as they spot it. In reality, we often zero in on expenses only in a scramble to get back to sustainable profitability when the economy stagnates and growth stalls. But panic can lead to costly mistakes, and experts caution that while paring down may be necessary in the current climate, entrepreneurs should be careful not to cut so deep that they poorly position their companies for an eventual rebound. Here are three costs to reconsider and three cuts to avoid.
Smart Ways to Save
- Say no to costly customers. For a growing business trying to win big-name clients, it can be very tempting to bid low for a high-profile project. But if the job is going to cost you rather than make you money, you have to take a hard line, says Martin Davis, 38, president of interactive development agency Ratchet. Davis recently had to turn down a project for Nike Bauer, which would have been his first for the global sports equipment manufacturer. "There was just no way we could deliver for the budget they had," he explains, adding that his company engages in a thorough, transparent process to estimate the cost of projects for clients to ensure it agrees to the right price.
A closer look at each customer's profitability will be surprisingly revealing as you find that who you thought was your best customer is really your worst, says Jim Muehlhausen, author of The 51 Fatal Business Errors and How to Avoid Them. "It's scary, but you need to fire those customers. Not only will it save you money, but it will also make your business a lot easier to run." - Look at your tech expenditures. "We all tend to overspend on technology," notes Joe Knight, author of Financial Intelligence for Entrepreneurs and co-owner and CFO of SetPoint Systems Inc., a manufacturing automation equipment company. "And with small businesses, we get caught up in paying for technology that isn't really enhancing the business." Separate the need-to-have from the nice-to-have, he advises, and if you're paying for software licenses, go back to the company and haggle. "We've found that we can go back and renegotiate software maintenance fees because those companies are hurting, too," he says.
- Bid farewell to underperformers. Given that people are probably your most expensive asset, you can't avoid personnel decisions when cost-cutting. Small-business consultant Tom Long recommends identifying the bottom 10 percent performers in the company and sending out the pink slips. Says Long, "One way or another, poor performers wind up costing you."
Penny-Wise, Pound-Foolish
- Don't fire great people. Cutting key performers simply because they're well-compensated can kill morale--and possibly your business--so make strategic cuts and hold on to your best people, says Muehlhausen. "If Mary is a superstar, you better find a way to keep her around." Replacing senior staff with a greater number of less expensive, junior bodies can also set you back, as Davis learned. "It ended up costing more hours, and we had to bring in more senior people to fix the mistakes," he says.
- Beware of hitting bone. While you want to make sure your marketing dollars are spent wisely, resist the urge to cut the budget dramatically as a knee-jerk response to the recession, says Ira Davidson, director of the Pace University Small Business Development Center. "Now might be a good time to increase spending because your competitors, in all probability, are automatically saying, 'Times are tough; I have to cut marketing.' You may be able to pick up customers or market share because other people are cutting back."
- Keep your benefits. Good benefits, including medical and dental insurance, certainly don't come cheap, but they do keep you competitive with larger employers in the ongoing war for top talent. If you cut them now, you may find that when things turn around, it will cost you more to get back on track, Knight points out. "If you're going to have a long-term business, you've got to take care of your people," he says. "I know a lot of small-business owners who will keep their people and cut benefits. I would rather keep the benefits and have to cut staff."
This story appears in the December 2008 issue of Entrepreneur. Subscribe »
