Assessing the current macroeconomic landscape can be challenging, and the news often seems mixed. However, I can share that many of the companies I work with have started cutting and reducing costs in anticipation of tougher times ahead.
It’s easy to run a business when the arrow points up in a robust market that helps drive growth. But if you run a business long enough, you recognize that the growth periods are always followed by a down cycle. That can spell problems because when the market shifts and opportunities dry up, your business might have an imbalance between its costs and its revenue.
In other words, it’s time to shift how you’re running the business because you can’t count on growth to save you anymore.
Let’s talk about three levels you need to rethink to run your business in tougher times and avoid running out of cash–which means game over.
Level 1: Rethink Budgeting
Budgeting is an imperfect exercise in trying to balance expenses with expected revenue for the upcoming year. When we budget in good economic times, we often get some leeway, so if we go over expenses, we can make up the difference by gaining more revenue.
But in tougher times, when you can’t count on that extra revenue, you need to be more cautious about budgeting for your expenses.
GE was famous for building its budgets and expenses using flat revenue forecasts. The team would then have a second conversation about what things would look like if they encountered growth opportunities.
When companies have good times, their budgets often get fat and flabby. You weave in extra expenditures like offering free coffee or increasing the amount the company pays on 401(k) matches for employees. Instead of having the annual sales conference in Orlando, you decide to splurge and go to Aruba.
However, if your business is facing leaner times, these are precisely the kinds of low-priority items that should be trimmed from the budget to keep the business lean and mean.
Level 2: Rethink Initiatives
As times get tougher, it’s time to look past simply cutting back on extra perks and looking more deeply at cutting back on company initiatives.
I’ve written before about how what you say no to defines you. In a constrained environment, you can’t afford to support everything you might have going inside the business. During the good times, you may have started new business lines to chase all the opportunities out there. Now, it’s time to assess which of your initiatives are winners and which are losers.
What you don’t want to do is give everything the same haircut. Instead, you want to identify your weakest programs, which might be 20 to 30 percent, and cut them to free up some resources to invest in your star programs.
You can apply this same principle to your staff. The worst thing you can do is treat your star players the same way as your C players. Don’t do that. As painful as it can be, eliminate the C players–the ones you don’t need anymore–so you have the resources to reward your A players with raises and bonuses.
Level 3: Rethink Everything
If things tank and your business faces a dramatic reduction in revenue, maybe from a loss of a key client or a major downturn in your industry, you need to put everything on the table. Nothing can be considered a sacred cow. Your only goal is to preserve the business.
The best approach to this difficult task is to start at your core. What is your business best at? Start there and then slowly build or cut outward.
For example, I worked with a very successful company with its roots in the coffee business. Coffee, as it turns out, is a high-margin product. Over time, as the company gained more success, it added other consumer products like packaged food. But, when this company’s market tanked, it pivoted by pruning back on everything except its core coffee business.
It’s critical to recognize that adding complexity costs a business because you’re adding extra people and processes that might not add value. Refocusing on the core of the business helps simplify it and balance expenses with revenue. The simpler you can make your business during tough times, the easier it will be to survive and see the other side.
One last piece of advice is that when you are forced to make cuts like this, cut once and cut hard. Remove as much cost and complexity as you can. I’ve found that it’s easier to hire people back later if you’ve cut too deep than to soon possibly face an even worse fate if you don’t cut deep enough.
Planning for a Downturn
I sincerely hope your company doesn’t see any downturn and continues to grow. While the macroeconomic numbers still look decent, it still pays to plan for tougher times ahead. So, use this article as an outline of how you can think about shrinking your business to best weather the new reality ahead of us.
