When customers are scarce and you're having a hard time paying your bills, you need to start hoarding your cash. You can reduce the amount of money flowing out of your business in various ways—and implementing just a few can make a big difference. Also, see our article on how to create more cash to help your cash flow.
You can look to these main areas when you need to cut costs:
Business expense reduction, of course, is easier said than done. Here are five creative, cost-cutting business ideas to help you spend less without crippling your business.
If you find you need professional help as you cut costs, you should reach out to a business lawyer. They can help you renegotiate contracts, manage employees, and settle debts.
If you're planning on painting your building, buying new equipment, or hiring additional employees, wait. You should only move forward with expenses that are essential to carrying out a crucial marketing or diversification plan. In virtually every other instance, just close your checkbook.
Even if you've made a contractual commitment to spend money, you can try to negotiate your way out of it. If you're willing to pay a reasonable buyout fee, ending an unfinished contract is legal and honorable. After all, once clued into your financial problems, the other side might be happy to accept a partial payment from you rather than risk your business failing and receiving no payment at all.
When times are good, it's easy to commit to buying or leasing expensive equipment. Think big purchases like:
Take a hard look at everything you own, especially items you're still paying for. Sell everything you don't need.
Even if you sell a vehicle for less than you owe and must make up the difference to pay off the loan, you'll often net large cash savings over time. If you used your vehicle as collateral to secure a loan for it—that is, you agreed that the lender can take the vehicle if you fall behind on loan payments—you can try to use the collateral to satisfy the loan. Ask the lender if surrendering the collateral will cover what you owe on the loan. If it doesn't—for instance, you owe $10,000 but the collateral is only worth $8,000—see if the lender will forgive the difference (or the "deficiency").
And if you still need the item from time to time—for instance, your job needs an extra bulldozer this time—you can probably rent it by the day for far less.
Don't forget leased equipment. If you're leasing equipment you don't absolutely need, ask the leasing company to renegotiate payments or cancel the lease in exchange for them taking back the equipment.
If no one takes your requests seriously, don't be afraid to involve a lawyer, who should be experienced in explaining that without quick cooperation, your business might fail. Especially if the leasing company believes you might close down and file for bankruptcy, it'll likely make you a better offer or take the equipment back. For any money you still owe on a vehicle or equipment you own, an attorney might also be able to convince the lender to dismiss the debt entirely if you hand over the collateral, even if there's still a deficiency.
When sales drop, you need to increase your marketing outreach. But it's not usually cost-effective to expand outreach by paying for expensive advertising or other high-cost techniques.
Instead, your cash preservation strategy should usually direct you to cut conventional marketing costs, and instead rely on low-cost guerilla marketing efforts. For instance, you can enlist your loyal customers to help rescue your business by having them post promotional content on social media or by bringing two friends to a weekend sale. (See more on low-cost and effective marketing.)
Assuming your business still does a significant amount of travel, cut it at least in half. Just committing to this will force you to focus on eliminating the least profitable half.
Faced by tough economic times, the last thing you want to do is eliminate essential insurance coverage for fire, theft, and liability. But by increasing deductibles and canceling less essential coverage for things like business interruption or the death of a key employee, you might be able to reduce your overall payments.
It makes more sense to scrimp on insurance if your business is organized as an LLC or corporation than it does if you're a sole proprietor or partner and therefore personally liable for business losses. If you're faced with a lawsuit, they usually can't come after you personally if you have an LLC or corporation. The lawsuit could sink your business—if your insurance coverage isn't the best—but you'd likely walk away without owing any money personally.
If you're a sole proprietor or partner, it's more important to at least have some kind of insurance because someone could come after you personally in a lawsuit against your business.
Also, if your business is co-owned and you've established a buy-sell agreement to allow surviving owners to buy out the deceased owner's inheritors, you might've also bought a life insurance policy to provide funds for the purchase. If so, consider canceling this policy, and if you've had it for a while, pulling out its cash value, if any.
All businesses buy things. It should go without saying that buying in smaller quantities and negotiating lower prices will help preserve cash. But given that prices usually go down when volume goes up, getting better prices for smaller quantities might seem impossible.
But when times are tough and suppliers are hungry for business (especially from companies that pay on time), you'll be surprised at how many will lower prices, if you ask and don't take no for an answer.
Don't overlook basic expenditures, such as:
Even for smaller purchases, often it's best to ask for bids (prices) from a number of suppliers, including your old standbys. And don't sign a long-term contract with the first vendor who offers you a better deal. If someone eager to get your business offers you a lower price, the vendor you use now will probably try to keep your business by going lower still.
If you take credit cards, chances are that you pay your processor too much, giving up cash you desperately need. Because many banks quote a complicated menu of charges to handle different types of credit cards, comparing prices can be confusing and time-consuming. (The complicated process is deliberately calculated to give bank sales reps a huge advantage over often extremely busy merchants.)
As a general rule, if you solicit a number of bids and buy your own processing equipment, you'll save a significant amount. But because getting several bids might take time you don't have, here are a couple of shortcut ideas:
Handing out money at $300 per hour is no way to save your business. Reconsider the money you're spending on lawyers, accountants, and other professionals because these fees can add up quickly. Try these tips based on your business needs:
Every business we've ever seen prints far too many copies of far too many pieces of paper with much of the paper ending up in the trash. Consistently printing too much isn't the only money-eater; lots of businesses pay far too much even when they print exactly what they need.
For example, if you're printing 3,000 copies of a four-color catalog at a printer down the street, chances are you can cut your bill in half by using two colors and getting bids from half a dozen area printers. When the lowest bid comes in, ask how they can cut it further, possibly by using a slightly unusual type of paper left over from another job or waiting a few days until their equipment will be idle.
Whether you rent or own your office building, you have a few cost-saving options to consider. If you rent, then your priority should be to save the most money, even if only in the short term. If you own, your priority should be to make money as quickly as possible while you still have your valuable real estate asset.
Renegotiating an ongoing business lease to get a lower rate is rarely easy. But if the economy has caused tenants in your area to be thin on the ground and your lease will be up for renewal soon, chances are good that if pushed, your landlord will give you a better deal.
Even if you have a long-term lease, try to renegotiate. If properties are empty around you and you open your books and show your landlord that without a reduction in rent your business won't survive, they might be willing to accommodate you. One possibility is to propose a significantly lower rent for the next year, with a built-in increase to kick in when and if your sales return to normal levels.
Be careful not to trade a short-term rent reduction for a significantly longer time commitment because you can't know for sure that this adjustment will be sufficient to keep you going. Also beware that in exchange for your requested rent reduction, your landlord might ask for your personal guarantee (even if you're organized as an LLC). A personal guarantee will make you personally liable for the business loan, and giving it could imperil your personal credit and assets.
Unless you have a personal relationship with your landlord, it can often help to let someone else do the negotiating. A lawyer will know how to reassure the landlord that your business can survive if you resolutely reduce expenses, while at the same time suggesting that if you can't quickly reduce expenses, bankruptcy might be your only option. Landlords typically know that they might not get paid—or if they do, then they won't be paid for many months—if you file for bankruptcy. So they'll be more motivated to work with you to prevent your filing.
If your business is losing money, your real estate might now be your most valuable asset—make sure it's producing every penny of income it can. If you own, then renting out extra space can help you make your mortgage payments or even make you some extra money.
If you rent, then you can save money by splitting the rent. If your business downsizes, rent out unused space if your lease allows it (you might need to obtain your landlord's consent beforehand). You might even want to look at moving your business to another location and renting out your entire building.
You might conclude that it would be impossible to find a subtenant because other businesses also have surplus space. But it can put real dollars in your pocket to think again. List your vacancy online and canvass your area for a subtenant who can no longer afford space of its own.
Be creative. Even formerly fiercely competitive retailers might survive by operating out of the same space or combining offices, warehouses, or even small manufacturing operations.
Companies spend on salaries, benefits, and perks to keep workers happy and operations running. But you have several opportunities—for instance, cutting hours and pay—to reduce costs without laying any employees off. The more you already offer employees, the more you can save by cutting those extras and shifting around schedules.
When making these cost-cutting decisions, check that you're complying with employment laws, especially if you're planning to lay off employees. An employment law attorney can also help you make sure you're following all state and federal laws.
Your business can and should cancel any extra perks, including:
After you've canceled extras, examine every other check your business writes. Even when cuts are more symbolic than significant—such as no longer buying pizza for meetings or renting parking spaces for employees—working hard to chop every possible expense sends an important message to everyone associated with your business that you're determined to do what it takes to survive.
Benefits should be the next place you look to cut employee costs.
For example, if your business matches your employees' contributions to a 401(k) plan up to $1,000 per year or it has other generous benefits such as paying health club memberships, alternative wellness programs, or a pricey dental plan, seriously consider eliminating them. Although painful, when times are tough it's better to cut most benefits rather than to lay off people.
The one big exception is your medical plan. If you provide one, do your best to keep it, even if you have to cut your premiums by raising employee contributions and co-pays. For most people, health insurance is an essential part of their personal safety net, and if you don't provide it, they'll look for an employer that does.
Payroll is the biggest expense for many small businesses. If this is true for your enterprise, it follows that cutting other expenditures alone is unlikely to produce the savings your troubled business needs. Sooner or later—and the sooner the better—you'll need to reduce the size of your payroll.
In bad economic times, when jobs are scarce, it's usually possible to cut pay by a small percentage and not lose employees. When deciding whose salary to cut first, you should follow your company's hierarchy:
This cut-from-the-top approach usually makes sense for several reasons. First, it should help you save money without losing essential employees. Second, and perhaps more important, it sends a message to everyone connected to your company that you and other managers take personal responsibility for coping with tough times.
But before you cut anyone's pay, look at your state's wage and hour laws and review the Fair Labor Standards Act. Researching state and federal laws can save you down the line if an aggrieved employee sues. You can also run any employment law questions by an attorney first before you make any pay cuts or other decisions that affect your workforce.
Another way to spread the economic pain while saving jobs is to cut the work week.
For example, going to a four-and-a-half day work week saves 10% of payroll; a four-day week saves 20%. Similarly, putting a freeze on overtime hours will save you money.
If your employees are highly motivated to see your business through to better times (and appreciate the fact that the cuts avoid or reduce layoffs), the change won't significantly reduce productivity. People will realize that to keep your enterprise afloat they need to work a little harder and smarter to accomplish the same amount of work in less time.
A few employees might quit, but in a poor economy, most will be disposed to hang on to what they have.
Cutting jobs and showing loyal employees the door is never a pleasant prospect. But for many businesses where payroll is the biggest cost, it's the only realistic way to achieve needed savings. You'll need to decide quickly how and when to make layoffs.
In the big business world, a CEO can order 10,000 job cuts without ever meeting anyone who gets laid off. But reducing a small workplace entails the excruciating task of laying off people you know well and are on friendly terms with. It's so hard that some businesspeople watch their business fail rather than wield the axe.
But to survive, you must accept the proposition that your duty to your employees is limited by economic reality. Remember, you hired employees in an effort to make a profit, not to pay them in all circumstances forever.
Always cut jobs, not people. Things are likely to go downhill further and faster if you base your cuts on the personal needs of the people who work for you, sparing those who have the most sympathetic personal problems. If you keep them, then it means you'll be cutting those who are more efficient or needed. Far better to look at the tasks that need doing and the people who can do them best.
In a very small enterprise, it'll fall to you to decide which jobs must go. But if you depend on others to help with management decisions, it's extremely important to solicit their help in deciding who you should lay off, unless of course you've decided that the manager must also go.
Managers, not you, probably have the best frontline knowledge of which tasks are essential and which are expendable. And because managers are the ones who'll be responsible for accomplishing the essential work with a smaller staff, they're likely to be highly motivated to hold onto the most talented workers who can do the most for the company.
If you're far behind on your bills, and especially if you think you might have to close down because it will be impossible to catch up, consider asking your creditors to write off a portion of your debt. Negotiating with your creditors to lessen your debt might be just what you need to get your business through difficult times.
Your pitch should normally be along these lines: "Our company can't survive the economic downturn with its current debt load. But following our new frugal business plan, we can survive and prove to be a good long-term customer if our debts can be reduced on a one-time basis."
The creditor might be willing to accept as little as 40 to 60 cents on the dollar, especially if it believes you could go bankrupt without help—or if you've found a new source of income to tide you over (perhaps a hard-headed investor who will invest only if you reduce your debt load).
If you don't have cash to pay off a portion of your debt, you'll have a lot less leverage when it comes to trying to convince a creditor to write off part of it. As an alternative, you might be able to convince a creditor to instead convert your debt to a term loan with low initial payments. (Again, agreeing to sign a personal guarantee is probably unwise, especially if you have valuable personal assets and your business might fail anyway.)
Or if your creditor really believes in your future, you could offer them to trade your debt for an equity stake in your corporation or LLC.
Creditors will be far more likely to support your survival plan by writing off a portion of your debt if they really believe you're taking the hard steps necessary to return your business to profit; consider opening your books to show them your business plan.
Because it can be difficult to beg for debt forgiveness while promising that your business can operate in the black if you receive it, it usually makes sense to involve a small business consultant or a business lawyer with debt settlement and bankruptcy experience. You can try to settle your debt with your creditors on your own first, and if that doesn't work, hiring an attorney can be a great next step.
A call from a lawyer might be just what a creditor needs to realize that your offer is far better than a notice of your bankruptcy filing.