The decision to reduce or eliminate expenses for a company leader is never easy nor pleasant. There are many reasons. One, reducing expenses forces a decision and an important decision requires analysis which requires time for thought. Particularly in a growing business, time is precious. In this fight for time and attention, deep thought often takes a back seat which is a huge mistake. Secondly, reducing costs very often requires reducing people. Anything that affects people affects lives of families and relationships sometimes built over years. These types of decisions are some of the very hardest for business owners, yet absolutely necessary during critical periods of the business cycle. The hardest decisions in cost reductions happen when company leaders wait too late and the decisions affect even more people and the potential survival of the company. There are at least four occasions when expense reduction becomes necessary.
- Financial Metrics Reveal Weakness– There is a reason to have accurate financial information of past results and to review these results timely and quickly, so important corrective action can be made immediately. When financials reveal the company is struggling, particularly after two to three consecutive months, it is time to take action.
- Forecast Estimates Look Bleak– A company that does not continually forecast profits and cash is flying without direction. When a forecast clearly shows a future reduction in profits and cash, it is time to take decisive action now.
- No Value is Added– Always ask, what expenses are being incurred that add absolutely no value? These costs should be eliminated immediately.
- Before the Expense is Incurred– Peter Drucker said, “All of us have learned that it is much harder to get rid of five extra pounds than it is not to put them on in the first place. In no other area is it as true as it is in cost control that an ounce of prevention(emphasis mine) is worth a pound of cure( Drucker, p.228).”
For a business owner cost control comes with the territory and never ends. It must be a responsibility of everyone throughout the company. Concerning the workforce, Drucker well said, “If cost control is seen and practiced as cost prevention, then the workforce will actually see it as an opportunity, or at the very least it will support the cost control for the sake of better and more secure jobs(Drucker, p.231).”
*Drucker, Peter F., (2004), The Daily Drucker