Most new businesses will go through stretches where cash gets unexpectedly tight. Maybe you overestimated your early sales growth or one of your expenses went up significantly. When times get tough, your business needs to find a way to slash discretionary costs and stay afloat.
Cutting costs can have problematic effects though. Slash the wrong costs, and you could lose market share, alienate your employees, or cripple your opportunities for future growth. Here are a few tips for how to cut costs in the short term without jeopardizing your future.
1. Look for the little luxuries
Most businesses spend some money here and there that doesn't help generate revenue. Look for these costs to eliminate first, whether it's fancy hotels on business trips or lunches on the company credit card. It might not be much, but getting rid of these luxuries can add up.
When times are good, these luxuries serve a purpose. They help employees (and yourself) to be more satisfied, motivated, and focused. When cash is tight though, most employees will understand the need to make these small sacrifices. They'll certainly understand it more than a reduction in their salaries or bonuses.
2. Renegotiate deals
Examine the long-term contracts you have with suppliers, contractors, and landlords to see if there's room to tilt those deals more in your favor. Market conditions may have shifted to the point where they have no choice but to renegotiate a lower rate for you.
Obviously, you need to exercise some caution and common sense with this tactic. Don't try to play hardball with a supplier whom you can't replace, or renegotiate with a landlord when rents are going up.
Instead, identify situations where you have the greater leverage. If there are multiple suppliers or contractors out there offering what you need, you might be able to strike a new deal that saves you money.
3. Manage inventory
Purchasing new inventory, and storing the inventory you already have, can make up a major portion of your business' cost structure. Keeping inventory levels low helps you cut costs and reduce the chances of taking a big loss on unsold inventory.
In a normal environment, you might want to hold slightly more inventory than you expect to need so that you can be ready if customer demand is higher than expected. To cut costs, slash those inventory levels down to the minimum amount necessary to meet expected demand.
In this case it may be advisable to see if some suppliers can be flexible and deliver at a higher frequency. If your supplier agrees to deliver once a week rather than once every two weeks, you can keep a lower level of inventory on hand, reducing storage and maintenance costs.
4. Seek out tax breaks
There are a number of ways businesses can alter their accounting practices in order to pay lower taxes in the short term. For instance, a business can utilize accelerated depreciation to reduce their taxable income in the short-term. You can choose to record depreciation at a higher rate early in the life of your fixed assets, decreasing income, and therefore taxes.
The downside to this strategy, and most other tax saving strategies, is that you will probably have to pay higher taxes in the future. If you depreciate assets at a higher rate in the short term, they'll depreciate slower later on, increasing taxable income.
Ideally, you should have already been taking advantage of every possible tax deduction, but it's worth looking to see if you can deduct any new expenses to reduce your tax rate even further.
5. Be careful with cutting advertising
Advertising expense is often the first thing that businesses cut when times get tough. On the surface, this seems to make sense. Advertising is a discretionary cost, and if you cut that cost you can potentially survive on the customer base that you have already built.
In reality, slashing advertising expenses can be extremely dangerous. If your competitors are advertising when you aren't, they can take market share from you and hurt your competitive position. You have to save costs without detracting from your ability to bring in new customers at a future date. Some degree of customer turnover is inevitable for any business and if you're not marketing to bring new customers in the door, your sales are almost certainly going to decline.
This doesn't mean that it never makes sense to cut advertising costs. If you have a relatively stable market position, or limited competition, you will probably be all right slashing your advertising budget temporarily. Just remember, this should be a last resort if you cannot find other less productive expenses to cut.