In normal economic scenarios, companies often follow a top-down approach by starting with a revenue goal and working backward to their budgets and operating plans. But in a highly volatile economic crisis, revenue forecasts are no longer reliable.
To ensure profitability in a worst-case scenario, companies need to start by looking at their costs. This bottom-up approach of planning requires painful decision making and discipline, but it might just save your company when going through tough times.
Here’s a guide on how you can reduce operating costs during an economic downturn:
1) Review and adjust your yearly budget
Start with a detailed report of your finances. Establishing the baseline of your revenue and expenses can reveal any budget leaks. Once you’ve identified the shortfalls in your spending, it’s easier to reduce operating costs. Map out potential worst-case scenarios so you know all the possibilities.
Consider the current market conditions when adjusting your annual budget. Closely observe market trends and assess their potential long-term implications.
Set a specific target for where you want to reduce operating costs to. Then you can begin to assess cuts in order to preserve your runway.
2) Tighten budget and update your perks and benefits framework
Do an exhaustive sweep of all costs to identify where they’re coming from. This should give you an idea of which expenses can be eliminated and which ones to reduce.
For example, focus on organic methods for drawing in leads if you have relied heavily on paid advertising and expensive tools.
But one of the biggest areas to look into pulling back is employee perks. Evaluate your employee perks and benefits framework and figure a way to reduce costs without hurting employee morale.
It seems like a risky move (considering these perks are major performance drivers), but in times of an economic downturn items can be trimmed or eliminated as employees prioritize job security. Just be sure to involve them in the decision-making process so they feel ownership of these adjustments. Conduct surveys to determine which perks to keep, put on hold, or totally eliminate.
Here’s a sample employee response on benefits realignment:
3) Create a cash flow projection to ensure business continuity
Layout your 13w cash flow forecast and account for all upcoming Accounts Payable and expected Accounts Receivable. Ideally, businesses should have an efficient invoicing system for managing cash flow. If you had problems getting behind invoicing in the past, this is the time to dial in on your invoicing system. You need to have control over your APs and ARs if you’re navigating through an economic downturn.
Here’s a sample 13w cash flow forecast:
Closely examine every AP and AR and apply scrutiny to probability. Factor in any potential shortfalls and imagine worst-case scenarios, especially considering the current environment.
4) Condense your cash conversion cycle
Once you have identified all upcoming APs and ARs, it’s time to get down to improving your working capital.
Ask vendors to push invoices without penalty and/or break into smaller payment, and encourage customers to pre-pay by offering discounts. This can help move cash in faster and significantly condense your cash conversion cycle.
Tapping into Venture Debt, SBA Relief loans, and discounts or offers from vendors can also help you get more cash rolling.
Here are some proven steps on how to shorten your sales cycle and improve working capital:
Be very thoughtful about implementing these strategies. It’s easier to deal with talking to vendors to ask for leeway or encouraging customers to pay early when you’re the one in a temporary bind.
But during a downturn where a significant decline in activity is the same across almost all industries, having these conversations can be tough. Establish a sales guidance plan that is aligned with certain response segments for each circumstance.
5) Communicate your cost adjustment strategy across your workforce
Budget changes and cost reductions will likely cause confusion and fear among your employees, especially since they’re aware of the economic climate.
Conduct a company town hall as soon as possible. When you make the announcement, make sure to cover the following:
- Reason for budget changes
Employees will most likely have an idea why budget cuts need to be made but communicating the reasons will help reduce uncertainty and remove any doubts regarding the company’s financial health. Emphasize why you’re doing the cuts now and discuss the worst-case scenarios you are trying to avoid.
- Updated budget plan
Layout your modified budget to the team and emphasize transparency throughout the entire process. This will help build trust and encourage your employees to carry their own weight as you navigate your organization through a rough patch.
- Moving forward
Questions about security will definitely come up. There is no way to be certain about the future and you can’t promise what you do not know. Acknowledge their fears but also focus on the positive. Strong, thought-out goals can eliminate – if not ease – these fears. Present your short- and long-term goals and discuss what is being done to make sure your company is more prepared should another economic contraction occur.
Adapting to sudden downturns is necessary to ensure business continuity. When facing a global economic crisis, you should prepare for the new normal and think through your steps so you can emerge stronger on the other side.