Prime CutsPosted on Saturday, May 3rd, 2003 by Laton McCartney
Eliminating fat from the budget can boost profits, but cutbacks that are too deep—or misdirected—can get your company into trouble. Here’s how to stay lean and mean in tough times.
Like everyone else these days, small-business owners are trying to make do with less, trimming expenditures and often putting plans for expansion, new equipment and added personnel on hold. But while cutbacks are usually the order of the day in a down economy, they’re effective only if they can be enacted without impairing revenue or undercutting your competitive edge. In fact, they should help rather than harm your business.
To determine where cuts and changes can do the most good—and, more important, help you weather current economic turbulence—you should start by looking at your business as if it’s in decline, says Dr. Ron Cook, professor of entrepreneurship and small business at Rider University in Lawrenceville, N.J. “Then, you need to determine how to best strengthen it,” he says.
Cook says you should begin with a strategic approach. He says that small-business owners need to concentrate on questions such as, “What is my sustainable competitive advantage? Why do customers choose me over the competition?”
Entrepreneurs should rely on a business plan to strategically sustain and strengthen their competitive advantage, Cook believes. Use the plan to define your business concept—figure out how to best market it, get a fix on business costs and project cash flow. Once all of that has been nailed down, you can take the necessary tactical steps, such as controlling costs and recognizing new opportunities.
Even with a first-rate business plan, many entrepreneurs are at a disadvantage in initiating cutbacks because they don’t have a good handle on all their expenses. “Often business owners don’t know where their dollars are going,” says Dr. Robert Sullivan, a small-business consultant and author.
“The first rule on cutting costs is understanding cash flow,” adds Cook. “Many small businesses never force themselves to identify which expenses are essential until the money becomes tight.”
Before making any moves, you have to do your homework, Sullivan advises. “Figure out all your expenses by category, then print them out on a ledger and compare each category against the previous year or even the past two years if you have those figures. That way, you can see where your costs have been escalating.”
If you’re writing large checks every month for things such as health insurance and rent, the expense ledger probably won’t yield any surprises in terms of your big-ticket items. It’s often the small expenses—spending for items such as office supplies, energy consumption and travel—that can add significantly to your overhead. Here’s where you can begin to generate major savings and, at the same time, adhere to your business-plan objectives, Sullivan says. “For example, 80 percent of all travel is unnecessary—nothing more than a boondoggle,” he maintains. “In justifying going on the road, your salespeople will tell you they need to get in front of the customer, but that’s your grandfather’s way of doing business. You can get the same results by using email or the telephone.”
Sullivan also believes that you can get a bigger bang for your buck by comparison shopping for everything from telephone services to office equipment. Adds Cook, “Check your phone bill and compare rates using Internet sites such as Saveonphone. com that break out long-distance rates nationally. Practice energy-load management—running power-intensive equipment at off-peak times to see if you can get off-peak power rates. Get quotes from multiple sources, and buy in bulk when possible. Bottom line—is there a better deal for you?”
Finally, Sullivan says that the dollars you earmark for promoting yourself through traditional approaches such as brochures and mailings can be more productively spent on a Web site. “But that site has to be carefully attended,” he cautions. It shouldn’t be a project that is given to someone on your staff just because he or she is the most technically savvy. Have the site designed, built and operated professionally, Sullivan urges. It can be outsourced for little money. Operating a small- business Internet site typically costs from $25 to $100 a month.
When and What to Outsource
A growing number of Fortune 1000 firms are farming out everything from their information technology (IT) operations to business processes to outside parties for one overriding reason: saving money. By outsourcing technology applications and operations, for instance, big companies can shave as much as 30 to 40 percent off their IT budgets.
For entrepreneurs, however, the rationale for outsourcing isn’t necessarily cost cuts. “Small businesses need to focus on how they can drive revenue by deploying functions and tasks outside the company,” says outsourcing consultant Michael F. Corbett. “They’re probably not going to be able to reduce headcount and slash their spending that much by outsourcing.”
By offloading functions that outsiders can probably do better and more cheaply, however, you can concentrate more intently on the objectives laid out in your business plan.
Outsourcing takes different forms. Corbett, who heads his own small company, Michael F. Corbett & Associates Ltd., works with a number of outside organizations with which he already had a solid, existing relationship. “My CPA now serves as our CFO,” he explains. “Our bank manages the company pension plan and paycheck process.” As a consequence, Corbett now has more time and energy to focus on what he does best (and what drives the company’s revenues): training executives worldwide how to use outsourcing as a management tool.
Randi Killian, who heads Randi B. Enterprises Inc., a strategic marketing and branding firm, gains the same kind of benefits from going outside rather than retaining certain key tasks in-house. Killian relies on Premiere Small Business Assistance, run by Robin Kramer, when he launches a marketing seminar. “One of my services is offering a series of marketing clinics, and I use Robin to send email invitations, follow up by email or phone, handle all logistics for facilities and food, keep track of attendees and process credit cards,” he explains. “She also collates class materials. All of this allows me to continue to give my other clients the face time they require. It also frees me up to look for new business.”
In turn, Premiere Small Business Assistance, which has clients all over the world and provides everything from Web site development to virtual office management, also relies on outside service providers to fill specific niches as they arise. “I can tap into a virtual community of consultants whenever I need them,” says Kramer. “This enables me to help my clients by letting them focus on the core businesses that drive their revenues.”
Today, cost-conscious small businesses are relying on outsourcers for everything from sales and marketing support to HR management and collections. Ron Cook, however, cautions that some functions are better done in-house. “For example, if you rely on an outside financial services firm, you may be depriving yourself of essential information to understand the workings of your business. You need to be in touch with the numbers.”
Technology also can be used to generate savings and bolster productivity. “Consider computer systems that can answer phones, monitor inventory and track payroll,” Cook says. In evaluating the potential benefits of IT solutions, he suggests looking at your major cost centers and seeing where technology can have a positive impact.
“I used to be a partner in a snowmobile franchise in New York State, and one of our problems was keeping track of inventory that consisted of 15,000 parts,” Cook says. He installed an inventory system that quickly paid for itself many times over and enabled the franchise to respond far more quickly to its customers’ needs. For business owners, the current economic morass has at least one benefit: Prices for PCs, servers and technology accessories are at record lows.
There also are a number of ways you may be able to cut costs on at least one major item: office space. For entrepreneurs who are just starting out, there’s an alternative to renting conventional space and buying or leasing office equipment and furniture—that is, renting office suites that have everything you need to get going on a short-term basis.
“When you rent office space, the landlord usually expects you to sign a three- to five-year lease,” says Jeffrey A. Landers, founder and president of the New York–based Office2share.com. “But in these times of economic uncertainty, you need flexibility. If the business doesn’t work out, the owner is stuck with a multi year obligation. Conversely, if the business takes off, the company could soon outgrow the space.”
The alternative is a fully furnished office suite, which includes office equipment, furniture, a conference room and staff. You may have to shell out more for services than you would if you had your own staff and equipment. “You might have to pay $35 an hour to have a letter typed or $2 to send a fax, but you’re testing the water,” Landers says. Office2 acts as a national online directory service for business owners seeking or renting office space.
If you find yourself with too much space because of cutbacks, think about subleasing. “I had a client who had 30,000 feet of office space, 10,000 of which wasn’t being used,” Sullivan says. “The client found someone who would rent it on a month-to-month basis simply for storage and was willing to pay more rent than the client was paying.” The upshot: an added revenue stream.
Stay With the Game Plan
Whether you’re trying to slash your rent or zero in on something relatively minor such as energy consumption, you have to stick to the business plan. That means reallocating at least some of the resources you free up to make you more effective in selling to customers and attracting new ones. Otherwise, your trimming won’t amount to much more than an exercise in futility.