5 Suggestions When Reducing Costs Is Your Only Option

When you face challenges, follow these tips to make your company stronger.

learn more about Doug and Polly White

By Doug and Polly White


Opinions expressed by Entrepreneur contributors are their own.

A wise CFO once explained that when you cut costs to generate more profit, the upside is limited. When you increase profit by growing sales, there is no limit. Therefore, we would encourage you to think about opportunities to grow revenue before cutting costs.

That bit of wisdom notwithstanding, companies should run as efficiently as possible and there will come a time in the lifecycle of most businesses when expenses need to be reduced. Following these five tips will make the process more successful.

1. Eliminate the frills

First-class airline tickets, luxury hotels, lavish company parties and expensive conferences are the first things that should go, particularly excessive perks at the executive level. Enforcing austerity measures on the rank and file while executives live high on the hog is a recipe for destroying the positive culture in your company.

Related: 7 Failures Every Entrepreneur Must Eventually Face

2. Look to suppliers for cost reductions

In good times, companies often buy from suppliers with which they are familiar. There may not be a push to get the absolute best deals. Difficult times provide a reason to review all of your company's vendors.

Does your company absolutely need the product or service the vendor is providing? Given the hard times, can you negotiate a better price or more favorable payment terms? Are there other vendors who would offer the same or equivalent products and services at lower prices? Are there ways of working with vendors that would reduce the total cost of doing business?

For example, we once worked with a client that purchased chemicals in plastic drums. They then paid to dispose of the drums. Discussions with their supplier uncovered that the drums could be recycled. Our client was able to negotiate a lower price because they reduced their vendor's costs and they saved the disposal cost.

3. Dismiss weaker staff members first

The time will inevitably come when a business has to reduce staff. While this is never easy, it can be necessary. Companies facing this challenge should make a concerted effort to dismiss those who add the least value to the organization first. This will probably mean that some longer tenured employees need to go, while newer, more talented employees are retained.

Tenure-based cuts most often result in a weaker, less competitive company.

Related: How to Regroup When You've Lost Your Way

4. Consider across-the-board reductions

If you would be just as happy hiring a new employee as keeping the one you have, these people are candidates for dismissal to reduce costs. However, if you have talented employees who you would absolutely hire back if you could, consider across-the-board reductions rather than dismissing these valuable people.

First, eliminate all overtime. If revenue is below forecast, there is no need for overtime. Across-the-board reductions can come as reduced salaries and a commensurate reduction in hours (reduce salaries by 20 percent and cut hours by the same amount). Alternatively, exempt and non-exempt wages can be reduced, but maintain hours as long as you do not reduce non-exempt wages below minimum wage.

A caution: make sure that executives share equally, if not more, in these reductions.

5. Replace guaranteed compensation with incentive-based compensation

If you feel that you must reduce exempt and non-exempt wages, consider implementing an incentive compensation program that ensures employees will earn back their lost compensation and more when the company's performance improves. Not only does this type of compensation provide incentive for employees to work hard to make the company excel, it also provides automatic cost savings when times are hard.

Implementing an austerity program is always difficult, but sometimes it's essential. When you face this challenge, following the five tips above will help make your company stronger.

Related: What to Do When Final Payment is Due and the Client Won't Pay

Doug and Polly White

Entrepreneurs, Small Business Experts, Consultants, Speakers

Doug and Polly White are small business experts, speakers and consultants who work with entrepreneurs through Whitestone Partners. They are also co-authors of the book Let Go to GROW, which focuses on growing your business.

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Business News

American Airlines Sued After Teen Dies of Heart Attack Onboard Flight to Miami

Kevin Greenridge was traveling from Honduras to Miami on June 4, 2022, on AA Flight 614 when he went into cardiac arrest and became unconscious mid-flight.

Starting a Business

Free Event | March 30: Solopreneur Office Hours with Terry Rice

Running a one person business is challenging, but we're here to help you. Tune in as our expert, Terry Rice, answers your most pressing questions.

Health & Wellness

5 Essential Steps to Expand Your Vision and Start Living Your Dream Life

It's time to break free from your comfort zone and expand your vision. When you refuse to settle for a mediocre life, you can start building a life you love.

Business Ideas

55 Small Business Ideas To Start Right Now

To start one of these home-based businesses, you don't need a lot of funding -- just energy, passion and the drive to succeed.