Careful what you cut Featured

7:00pm EDT January 26, 2009

Expense cutting is rampant during times of recession — and for good reason. During profitable times, we tend to spend more and analyze expenses less. Lax oversight snowballs into financial distress when the economy downshifts, and businesses are forced to take a microscopic look at their budgets.

Before you delete a department or lay off workers, consider whether the net result will improve the bottom line or sacrifice quality and customer care.

“While it’s necessary to evaluate and cut expenses during these economic times, it’s equally important to continue investing in certain areas of the business,” says Michael Coakley, director in the audit and accounting group at Kreischer Miller.

“Now is the time to analyze the business as a whole and identify areas that are inefficient or bleeding money,” he adds.

Smart Business spoke to Coakley about how businesses can recapture dollars and reallocate their current resources without cutting the business down to bare bones.

What should executives consider before cutting staff?

Layoffs are often the first response when the bottom line needs a boost. Human capital comprises a significant portion of a company’s overhead, so cutting back in this area seems logical to business owners making difficult decisions about how to sustain profitability. The problem is, a business cannot run without talented people. Companies need strong financial minds, creative marketing professionals, detail-oriented operations specialists — each brings an expertise to the table. In good times and bad, their contributions are critical to a company’s success. Assuming that your business is appropriately staffed and your workers are productive contributors, think carefully before terminating employees. Remember, you’ll need strong, responsible employees to help you weather the economic storm. Extensive layoffs can kill morale and negatively affect the company culture. Worse, valuable employees will feel insecure and start ‘looking.’ Layoffs should not be your first cut but instead a last resort after carefully evaluating the company’s operations.

How much can a company cut marketing without compromising client relationships?

You can trim marketing expenses, but do not cut them completely. Consider current marketing activity. What is critical, and what is luxury? Design a marketing plan that includes alternatives that will still allow you to ‘get in front’ of clients and continue your branding strategy. For instance, rather than buying premium seats at the Phillies game to entertain clients, place a phone call or visit their offices to simply ask, ‘How’s business?’

In the meantime, do not eliminate marketing designed to reach out to new customers. Whether you get your message/brand out by advertising in the media, participating in trade shows or sponsoring community events, completely stopping these efforts could damage your ability to gain business once the economy improves. Think about it. As other companies curb marketing, if you continue to get your name in front of potential clients, they will think of your company first when they begin spending again. Evaluate the most effective marketing methods that provide maximum returns. If you are not tracking leads to determine this, now is the time to start.

What internal processes should be refined as managers seek efficiencies?

‘Lean’ concepts have existed in the manufacturing sector for some time. Offices have their own version of lean, which involves, among many things, reducing the amount of ‘touches’ required to get a product or process from point A to point B. If a client request for proposal must be passed through a chain of four individuals before it can be presented to the potential customer, how can you ‘lean’ the process and conserve labor and time? This idea of leaning the company should be applied to every process and department. By isolating weak points and improving processes, you can rechannel lost resources (time, money) back into the organization.

How can a company gain buy-in from employees ?

Most employees understand the nature of the economy and will appreciate that the business is taking a careful look at how to remain stable. Engage your staff by asking for their input as you evaluate departmental processes. Make this a team effort, and insist that every worker add value to the company by being more conscientious about spending and seeking ways to improve efficiency. During this time, many employees are happy to stay put — they aren’t looking to jump careers or change jobs if they are satisfied in their work environment. Remind them they are important to your business. You may discover productivity gains as the staff teams up to strengthen the company’s bottom line.

What additional resources should businesses tap in to during this time?

Boards of directors are important resources, and their varied professional experience can shed light on difficult financial/operational situations that you confront. Make time for regular board meetings to discuss what’s going on in the business. Also, rely on advisers such as your accountants and attorneys to offer direction. Talk to your banker. Be open, be honest — and listen.

MICHAEL COAKLEY is a director in the audit and accounting group at Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or MCoakley@kmco.com.