NFIB

Cutting Costs Can Cost You Money
10/ 27/ 2003

by Jeffrey Moses

When cutting costs, there is almost always a tradeoff between achieving lower actual expenses and sacrificing something of value -- time, operational efficiency or staff energy, for example. It's important to analyze the total effect of cost cutting, examining the ripple effect throughout the organization for each cost reduction in terms of what is given up.

To help you understand the real cost of cutting costs, create a chart and list the advantages and disadvantages for each of the cost cuts you are considering. Your chart might include the following items:

Phone service and equipment: Downgrading your service plan or equipment may result in reduced calling efficiency for employees, missed incoming phone calls, slowness in answering incoming calls, busy signals for customers calling in (when call waiting or rollover isn't adequate for call volume), etc.

Volume purchases, with resulting lower per-unit cost: Buying in bulk means added money tied up in inventory, increased debt to finance, increased cost for storage and potential damage during storage.

Purchase of pre-owned vehicles: You will save money on the ticket price, but it is important to consider the possibility that a used car will have added repair and maintenance expenses.

Refurbished or less expensive computer systems. Once again, you will save money initially, but with a refurbished system or a system that is cheaper, but does not necessarily meet the needs of your business, comes potential limitations of software usage, speed, storage, reliability, flexibility and expandability. Also, increased repair costs could result.

Cutting back on employee conference attendance, club membership and career training: This tradeoff includes decreased business from networking, decreased status within industry, sacrifice of employee knowledge and skills, decreased employee morale.

Reducing or eliminating subscriptions to industry and general publications: When you cut the subscriptions, you are also cutting your employees' chance to learn more about the industry.

Cutting back on marketing/advertising: Clearly, reducing marketing expenditures without having a clear picture of potential reduction in sales can result in lost sales worth more than the money saved.

Eliminating employee credit cards. This could cause increased efforts and potential errors during tax preparation, added time for employees to fill out expense forms.

Downsizing number of employees, trimming salaries, reducing quality of raw materials used for manufacturing: Each of these items -- and other items that are fundamental to operations -- will have a direct impact on sales, operational efficiency, cash flow and profitability. Major decisions such as these should be made after consultation with business advisers and accountants.

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