How to Cut Your Budget During Tough Economic Times

If your business isn’t performing how you want it, maybe in terms of its profitability, it might be time to examine your cost basis. I’ve written before about the power of price increases and negotiating with suppliers, but you might be at the point where you need to cut your spending rate.

So, how do you cut spending effectively?

Put C Players on The Chopping Block

No matter how you slice it, salaries are the number one cost in any business. I understand. We all want to avoid the discussion of cutting people from the payroll. But when it’s your largest budget item, you must face that cutting even 15% from your payroll can significantly impact your bottom line. There aren’t many items that have the impact of payroll reductions.

If you’ve reached this point, hopefully, you’ve already done talent ranking in your organization to know who your A, B, and C players are.

If you have, then the first move you need to make is to cut your C players–those who don’t add enough value to the organization to cover their salaries. Depending on how bad things are, you look at cutting some of your B players next. When it comes to your A players, you should do everything you can to keep them so you can rely on them to help you through the upturn.

The one thing you need to remember if you cut people is the impact that will have on the amount of work you can accomplish. Fewer people mean that you can do fewer projects. That’s why you need to be as surgical as possible regarding layoffs and initially target those project areas for people cuts that might be the least valuable to your customers. As people go, so do the lowest-value projects.

Cutting Variable Costs

Your second area to target when it comes to cutting costs is looking at your variable expenses, like training and marketing. There’s always room to trim here.

I look back at the businesses I ran during economic downturns, and I tried to keep my marketing budget stable. But I could never find a way to add new clients in a recession due to the nature of the product. If I had a do-over, I’d probably have cut back on marketing and allocated those dollars elsewhere. A famous study by a magazine published says you should continue advertising through a slowdown. There is a more nuanced view of the decision to reduce marketing based on the industry, the brand, and the effectiveness of marketing in creating customers during a recession. Were I marketing yachts, I suspect marketing wouldn’t impact revenue much in a tough economy.

Another area to watch is what you spend on perks. As a leader, you need to be aware of the optics of your decisions. If you’re still taking the sales team to the five-star hotel getaway when everyone else is suffering, that will not look great. A down economy might be the time to stay in hotels with plastic cups rather than glass.

Consider Salary Reductions–As A Last Resort

One area that a lot of business leaders turn to in a downturn is salary reductions. The idea is that starting with the highest-paid executives, employees take reduced pay for a while–maybe six months up to a year.

I’ve done this before, but I’m not a fan. I’m not in the “share the pain” camp. I prefer to terminate underperformers rather than make everyone suffer with lower compensation, especially A players.

My view is that when you ask someone to take, say, a 10% cut, they will immediately look to the market to see how they can get back to a full salary again. In other words, you are potentially increasing your turnover of the people you want to keep. Salary reductions are a poor strategy for talent retention. It’s far more effective to cut the people who shouldn’t be with you for the long term in the first place.

Cut Once; Cut Deep

There’s also a key lesson to embrace when making cuts to your budget: cut once and cut deep– deeper than you even think you need to.

There are two reasons for this. The first is that you might be wrong in your estimates. The worst-case scenario is when you cut once, and then you’re forced to cut again and again and again. Leaders do this in an attempt to preserve as many jobs as possible. This is what we call “death by a thousand cuts.” Morale sinks, and your risk of losing good people skyrockets. You don’t want to be here. It’s much easier to cut deeper and rehire when you’re ready to put things back together.

The other primary reason to cut deep is to create some cash buffer in the form of additional profits. Opportunities get created when a market is under stress, and you can take advantage by hiring an A player or buying a competitor weakened by the recession. If you haven’t cut deep enough and left yourself with a razor-thin margin, you won’t have the flexibility to jump on an opportunity like that.

Don’t Lose Your Credibility

The other lesson learned from cutting once, cutting deep, is to be as transparent and honest as possible about the situation. If one of your employees comes up to you and asks, “Is that the end of the cuts?” Even if every fiber in your body is aching to say, “Yes!” don’t do it. If you do, you might lose your credulity and the trust of your team if you have to come back for another round of cuts. I know–I have done this myself.

You’re better off by saying something like: “I believe we have done everything we needed. I hope that, if we perform as expected, we don’t need more cuts.”  By saying this, you’ve at least left yourself some room if the company does not perform as expected. It may not be what everyone wants to hear. But it’s the truth.

Keep Your Eye on The Prize: Survival