One of the interesting reactions to a recession is a business owner’s renewed focus on their Overhead Costs. In earlier downturns, we have encouraged clients to establish an internal team to evaluate all fixed and variable expenses of a business.
More than once, they have been given the nickname of The Razor Gang.
After all, a downturn of this magnitude means these cuts are necessary for the survival of the business and for the on-going security of those who survive the cuts.
It represents a ‘one-off’ chance to bring about unpopular or difficult change.
1. How do you start?
Perhaps the best place to start is to form your team (even over Zoom) and brief them about their purpose. There is nothing wrong with giving them a target, such as, needing to shave 15% from all controllable costs.
Circulate the detailed Profit and Loss report (Income Statement) for the past two full years as well as this year, year to date.
This information shows the outright expenses in various categories and highlights trends of those expenses that warrant further investigation. It is obviously wise to have members of your accounting team in the meeting.
Identify those expenses that are obvious candidates for review and identify those categories of expenses that warrant further investigation. Allocate tasks and follow ups to individuals to report back at the next meeting about specific costs.
Reconvene the meeting to analyse and discuss the findings to the team. Remember that you seek to ‘trim the sails’ not ‘sink the ship’.
2. Expense items to consider
Whilst every business in different, there are a number of common places to start:
Policies roll in year-round and the accounting people dutifully process them. It’s insurance … so you always authorise the payment.
Maybe, these policies are not what you want. Does the policy actually cover the precise risk that you think it does? Are you covered for your biggest concerns? Does it cover you for unlikely but high cost risks such as loss of profits, cybersecurity or key person insurance?
Are you over insured or under insured? Could you save money by increasing the deductable/excess? Has the replacement value fallen below the amount that you are insuring?
Could your balance sheet face a life altering event without your insurance company’s support? What would happen if your largest customer became insolvent? What would happen if your most valuable employee died? What would happen if you had a fire?
Do you have ever increasing premiums for Death and Disability insurance for yourself and your family as your need for insurance diminishes as your wealth grows? On the other hand, what would happen to your wealth if one of your dependent (or previously dependant) children suffered a critical long-term illness?
Are you getting the best deal?
Sadly, loyalty comes at a price. It is completely illogical, but businesses place a higher value on new clients than retaining loyal clients.
Have a policy of ringing around suppliers every year to check that you have the best and most appropriate deal for every major item that you buy. And probably minor items too. It all adds up.
Are you unaware of frequent flyer points being earned by your people because of their supplier choices? Would that sway them towards a particular supplier? Could you (or your business) be earning those tax-free points? Do you have the right credit cards to enable this to work properly?
Get tough with your bank.
Banking is a competitive business. Banks all want good businesses to bank with them. You are unlikely to be surprised to discover that our Australian banks actually make a lot of money from their customers.
Business owners pay a lot of interest, bank fees, merchant charges, credit card fees and other account charges that slip into the relationship.
May we suggest that you regularly put it all onto the table. Every few years it is wise to speak with an alternative bank and work out if you are getting a good deal.
It can cost a good deal of money to change banks, but we have seen banks happy to fund some or all of these costs to win new customers. Even if you ultimately don’t change banks, you can invariably get a better deal from the one you are with.
Sometimes it pays to use a specialist broker.
Recently government supported reductions of rent to assist with the impact of COVID-19 is unprecedented. For many clients, this is providing the urgent relief they needed at a time they needed it most.
Others (like us) were unable to get rent relief for the premises that were empty for many months. Nevertheless, some of the best outcomes have arisen where a tough discussion has been held with the landlord.
Landlords are often willing to provide permanent rent relief (for say 3 months) in exchange for an extension to the term of the lease (or some other change that will see the value of the property preserved or even rise). Short term pain for the landlord may be for their long-term gain.
Another path of thinking can be around the suitability of the premises. As we look ahead in time, we may find that both work practices and customer behaviours will change. Maybe you have too much space? Is it the right type of facility and is it located in the right place? Should you consider renegotiating the lease or perhaps re-leasing all, or subleasing part of it?
OMG … this is one of the most obvious and easiest cost cutting targets. Businesses are lulled into a belief (promulgated mostly by their salespeople) that all types of advertising, sponsorships, glossy publications, branding and PR are worth their weight in gold.
Of course, their value in difficult times is dubious at best and the whole marketing spend must come under the most careful scrutiny. For a new perspective on more effective marketing, we suggest you look at the section on Marketing Strategies in the Alp McNamara Downturn Guide.
Here is the hard one. We love all our people and would hate to ask any of them to leave.
However, some roles have become less effective and some are simply unnecessary. Some could be combined, and some might be better suited to becoming part time. The way your business does business may never be the same again. This is all about right sizing.
It is amazing how much can be saved when doing a careful review of human resource levels and appropriateness. Indeed, most owners will then go to a great deal of trouble to ensure that their best people are retained, recognised and redeployed where appropriate. Obviously, the lowest contributors are the most likely to go.
Should the Razor Gang decide that people may need to leave, change their roles or hours, or be given new performance targets, be sure to do it all at once. You want to support those who are leaving and be sure that everyone knows it is not personal. All those who are staying need to feel safe.
You will be amazed how such a shake-up can motivate the remaining staff. When the resources better match the work those remaining know they are needed – this will have a positive effect.
A great client once said to us, ‘get the cynic out of your business’ – there is never a better time than now.
Do you qualify for any of the state governments reductions or deferrals?
Subscriptions and other Monthly payments.
The great thing about direct debit is that you never have to think about whether the payment is made. That subscription will not run out. Not ever.
How many monthly amounts are coming off your credit cards and bank statements? Can you even account for them all?
What about the IT spend on licences? Do you even use all of that software? Do you need that many licenses? Has anyone ever reconciled the payments with the active users of all of that software?
A few decades ago, we had a client who sold his business. As part of the hand over process, the new owner wanted to know where a particular computer was. He needed to match the automatic monthly lease payment to this computer. Turns out that the computer had been scrapped over five year earlier. No-one thought to stop the payment.
Negotiate with everyone.
Have you ever been to Bali? Part of the fun is negotiating … for everything. It is expected over there. It’s fun!
It is the same for your business. You can instil an expectation with your people that you never pay retail price. It doesn’t matter who you are dealing with, it pays to ask, every time. Report on successes to each other and try to make ‘the art of negotiating’ a cultural norm.
It becomes habit forming and eventually your family will stop getting embarrassed once you start doing it all the time. Hey, as the famous joke goes, “Why did god invent Gentiles? Someone has to pay retail”
It’s a funny thing but after clients set up their Razor Gang and make the cuts to their Overhead Costs, they say … why didn’t we do this years ago. In fact, quite a lot of them look for excuses years later to repeat the process.
We hope you can save money and build efficiency in getting these costs under control.