During a crisis, most businesses will first preserve cash, then cut costs to stop losses. This is because business owners are still in panic mode, they will do whatever they “deem necessary” at that time due to survivor-ship, I can’t blame them.
Nevertheless, a good business person who is not panicking will look into various angles and evaluate what expenses to reduce and what not to reduce, this is what I mean by Cost Rationalization.
In defining what expenses are to be reduced, business owners need to understand the relationship between these expenses to their “Cash Producing Activities”.
What are “Cash Producing Activities“?
Cash Producing Activities are referring to activities that has relation to the activities that is generating cash flow to your business, be it directly or indirectly. To give you a better perspective, I will elaborate the nature of each expense:
STAFF COSTS
- One of the major costs in business. For service industry, this can be up to 50% of their overheads, how do you rationalize this expenses?
- As mentioned in Tip #1, unless you have explored all options, do not touch your employees; in the event if you have no other choices, you may consider the followings:
- As a “BOSS”, it will be ridiculous if you start cutting your employees before you consider yours. First look into your remuneration packages. Look into how much you really need for the next 6 months (in view of the MCO, you will have your loan instalments on hold, less entertainment, so technically you need lesser than usual). Take out those that you can cut, I’m sure there is already a saving.
- Next is to take out the expenses that are irrelevant during the crisis. E.g., your sales people are not traveling during the MCO, thus you should cut the traveling allowances (which is not their income after all). Your reimbursement or claims of Petrol, Parking & Tol should no longer claimable (which make sense if they are not going out to meet customers).
- Instead of thinking of how to cut these expenses, are you able to get them into income producing activities? Examples are:
- get your retail front-liners to learn to do online marketing for your online stores;
- excessive operation staff in restaurant? Can you get them to do delivery? Cover areas where your external food delivery vendors are not able to reach
- get your training department to start working on online training for your staffs. It’s a good time to learn because you always have excuses during busy periods
MARKETING COSTS
- another costs that most business owners will cut, as they deem unnecessary
- nevertheless, it’s depending on the industry, if you are still able to supply during the MCO, you need to shout louder than usual coz this is the time where there are more online shoppers than normal – typically those who are supplying essential products such as food, pharmaceutical products, grocery etc;
- for industries that fall under non-essential products/services, you may focus on rewarding programs to keep your customers informed and still buy from you even after MCO but branding exercises might need to be delayed a bit. Focus on promotional activities instead.
OUTSOURCING/CONSULTATION
- for many business owners, these expenses can be cut almost immediately as they do not see much value during crisis.
- again I would suggest you look at case by case basis:
- outsourcing of administration work such as bookkeeping, payroll, IT etc are one part of costs optimization, by cutting off these expenses, you are gonna need someone internally to do it, unless you have this person, otherwise negotiate for a discount from these vendors seems more practical;
- many may think that consultants are a burdens to a company’s cash flow, well it really depend on how big is their fee and how much value they are creating to you and your businesses. Some consultants are very expensive but you are unable to realize much value from his/her consultation, perhaps these will be the one that you can cut or reduced;
- whereas some consultants which are important to you business which you benefited from their services, instead of cut it off, best you negotiate the payment term or discount coz in the time of crisis, you need experienced consultants to support.
Cost Rationalization is about comparing the costs vs its benefit/value, instead of minimizing expenses. Look into maximize the value as an objective.