Cost-cutting should be a regular feature for all companies, even those that are profitable. Ad hoc measures are not a smart way of undertaking cost-cutting. Standards and procedures for all expenses incurred in a company should be created. For instance, travel entitlements for levels should be pre-defined. This should include the class of travel, daily allowance rates, and sundry expenditure levels.
In large corporations, project costs, and profit margins, are predefined in automated applications. All project-related expenditures must be logged into this system, and project approvals automatically happen when the project parameters follow pre-defined norms of expenditure and profits. I have rarely seen exceptions by senior management to the pre-defined rules of expenditure and profits. The systems and processes in these corporations ensure that projects stay within defined limits and losses are not incurred.
If stress is seen in the balance sheet despite set systems and procedures, then a detailed analysis of the company is required. Let me share some fundamental rules I follow when considering cost-cutting in stressed assets.
All companies know where their maximum spending is and where waste exists. Begin by listing such items. Anything not contributing to revenue generation will be the first place to look in any cost-cutting exercise.
Let me explain this concept with an example. An entrepreneur asked me to help turn around his company that could not service debt. It was an IT services company with a workforce strength of 1000 people.
The process that I followed was as follows:
I began by spending a few days examining in detail all his revenue and cost streams. It required looking at contracts, progress reports, and balance sheets, speaking with staff, etc. It was clear that the business was getting a regular stream of business, but a lot of that business was not yielding revenues that would cover all his costs. The more business the company secured, the more losses generated. The business was run on debt to maintain cash flows.
Immediate stopping of this low-margin business or resorting to cost-cutting on project expenses would have led to project failure, and an end to all revenues, resulting in bankruptcy.
Once the problem is identified, the turnaround process is put in motion. Those parts of the organization generating revenues that would cover costs and bring in higher margins were encouraged. The low-margin loss-making areas of the business were slowly and steadily phased out. People in the loss-making low-margin components were axed, and more staff was added where the margins were good.
Turning around and cost-cutting is a delicate and company-specific exercise. It is done with a lot of care and caution. Cost-cutting should not lead to disruption of the business and its bankruptcy. There is no size-fit-all solution. But it is all about identifying and removing waste and axing projects with low profitability.