How to Cut Costs and Spend Less in a Cash-Strapped Business

By , Attorney

When customers are scarce and you're having a hard time paying your bills, you need to start hoarding your cash. There are many ways to reduce the amount of money flowing out of your business—and implementing just a few can make a big difference.

Here are some of the main areas to look to when you need to cut costs:

  • discretionary spending (nonessential maintenance and employees)
  • rent (landlords are more willing to renegotiate a lease in an economic downturn)
  • capital costs (put off that new equipment purchase), and
  • payroll (you might not need to lay anyone off—instead, temporarily cut back salaries and hours).

Cutting expenses, of course, is easier said than done. Here are some creative ways to cut back on specific kinds of spending without crippling your business.

Eliminate Discretionary Spending

If you were planning on painting your building, buying new equipment, or hiring additional employees, wait. Only if a particular expense is essential to carrying out a crucial marketing or diversification plan should you go ahead. 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 are willing to pay a reasonable buyout fee, it's legal and honorable. After all, once clued in to your financial problems, the other party may be happy to accept a partial payment from you rather than risk your business failing and receiving no payment at all. If the other party simply won't renegotiate, accept a reasonable buyout offer, or otherwise work with you, you or your attorney may need to point out that if you can't stem the flow of red ink, bankruptcy may be your only option.

Buy More Carefully

All businesses buy things. It should go without saying that it will help preserve cash if you buy in smaller quantities and negotiate lower prices. But given that prices usually go down when volume goes up, accomplishing these things together may 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 phone service, electricity, copying, janitorial services, and payments to independent contractors.

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.

Look for a Cheaper Credit Card Processing Service

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, it can be confusing and time-consuming to compare prices, something 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 may take time you don't have, here are a couple of shortcut ideas. First, if you raise the issue at a local merchants meeting or industry trade group message board, you might find that someone else has done the comparison shopping for you. Second, check out the prices offered by Costco Services and compare them to what you pay now. Costco may not always be cheapest, but it's known for offering a high-quality service at a competitive price.

Stop Paying for Equipment You Don't Need

When times are good, it's easy to commit to buying or leasing expensive equipment—trucks, cars, bulldozers, electronic gear, forklifts, and so on. 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. And if you still need the item from time to time, you can probably rent it by the day for far less.

Don't forget leased equipment. If you are leasing equipment you don't absolutely need, ask the leasing company to renegotiate payments or cancel the lease in exchange for 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 may fail. Especially if the leasing company believes you might close down and file for bankruptcy, it will likely make you a better offer or take the equipment back.

Renegotiate Your Lease or Move

Renegotiating an ongoing lease to get a lower rate is rarely easy. But especially 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, he or she may 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.

EXAMPLE: Cleveland and June run Ambrosia Gifts at the Fairview Shopping Mall. Sales have fallen 40% but they must keep paying their lease, common area fees, advertising surcharges, and a small percentage of sales to the mall, the gift shop falls hopelessly into the red.

Believing that mall management will never negotiate a more favorable lease, they decide to close the store immediately and then research whether to file for bankruptcy. But to their surprise, no sooner do they notify Fairview Mall of their intentions than the mall, which by this time has a number of empty shops, offers to cut their rent and fees by 50% for the next 12 months. The deal convinces June and Cleveland that with a more energetic and creative marketing effort, they have a chance to survive.

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 of this: in exchange for your requested rent reduction, your landlord may ask for your personal guarantee (even if you are organized as an LLC). 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 may be your only option.

Sublet Unneeded Space

If your business is losing money, your real estate may now be your most valuable asset—make sure it's producing every penny of income it can. Especially if your business downsizes, rent out unused space if your lease allows it (you may need to obtain your landlord's prior consent). 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 may survive by operating out of the same space or combining office, warehouse, or even small manufacturing operations.

Cut Employee Perks

After you've canceled extras -- from company-paid cars, parking spaces, and club dues to the daily newspaper and bottled water -- 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 are determined to do what it takes to survive.

Cut Employee Benefits

Benefits should be the first 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 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 will look for an employer that does.

Cut Your Pay and That of Highly Paid Employees

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. If you are an employee of the company, the first person to take a pay cut should be you (and if your spouse works for the business, both of you). Even if your compensation is already modest, so that cutting it won't save much, trimming your own salary is sure to get employees' attention—and their respect—in ways a dozen dire financial pronouncements never will. Next, sit down with any well-paid employees to help them confront the need to voluntarily accept similar reductions. Depending on pay levels, the economy, and other circumstances, a cut of 5% to 20% may be acceptable. But be reluctant to cut the pay of people at the bottom of your scale. Not only is this the decent thing to do, it helps you keep experienced employees who, if forced to take less, would probably look for another job.

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.

This strategy isn't just for small businesses, by the way. To save jobs, shipping giant FedEx froze 401(k) contributions and cut all salaried employees' pay for 2009. The company's CEO took the biggest percentage pay cut, 20%. Other top executives were cut by 7.5% to 10%, and the rest of the salaried employees got a 5% hit. Hourly workers weren't affected. The company made these cuts even though it was still profitable—it was looking ahead to an expected downturn in shipping caused by the sluggish economy.

Cut the Work Week

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 may quit, but in a poor economy most will be disposed to hang on to what they have.

Lay Off Employees

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.

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 will 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 have decided that the manager must also go. They, not you, probably have the best frontline knowledge of which tasks are essential and which expendable. And because they are the ones who will be responsible for accomplishing the essential work with a smaller staff, they are likely to be highly motivated to hold onto the most talented workers who can do the most for the company.

For more information, see our article on how to make a wise layoff plan to save your business.

Increase Marketing, Cut Costs

When sales drop, you need to increase your marketing outreach. But it's not usually cost-effective to do this by paying for expensive advertising or other high-cost techniques. Instead, your cash preservation strategy should usually dictate cutting conventional marketing costs while relying instead on low-cost guerilla marketing efforts that, among other techniques, enlist your loyal customers in helping rescue your business. See our article on low-cost and effective marketing.

Cut Business Travel

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.

Reduce Professional Fees

Handing out money at $300 per hour is no way to save your business. Ask your lawyer to give you a discount and, if it's not forthcoming, shop around for someone who will. And make sure you understand what your lawyer's minimum billing interval is. If it's 20 minutes (meaning you are billed a minimum of 20 minutes for every call), bunch your questions together so you use all of the time you'll have to pay for. And if, as part of a plan to reduce expenses or deal with anxious creditors, you need your lawyer to negotiate on your behalf, do a little negotiating of your own and ask the lawyer for a flat fee stated in advance.

When it comes to accounting services, don't pay for bookkeeping that you can do much cheaper in house or by hiring a part-time bookkeeper. And again, as with every vendor, be aggressive in asking for a recession discount from your accountant, and if you don't get it, bid out your account.

Cut Printing Costs

Every business we've ever seen prints far too many copies of far too many pieces of paper with the result that lots end up in the trash. And 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. And 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.

Ask Creditors to Write Off a Portion of What You Owe

If you are far behind on your bills, and especially if you think you may have to close down because it will be impossible to catch up, consider asking your creditors to write off a portion of your debt.

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 may be willing to accept as little as 40 to 60 cents on the dollar, especially if it believes you may go bankrupt without help—or if you have 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).

Because it can be difficult to beg for debt forgiveness at the same time you promise that your business can operate in the black if you receive it, it usually makes sense to involve a small business consultant or a lawyer with business and bankruptcy experience. A call from a lawyer may be just what a creditor needs to realize that your offer is far better than a notice of your bankruptcy filing. (You can check Nolo's Lawyer Directory for in-depth attorney profiles of local lawyers.)

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 may be able to convince a creditor to instead convert your debt to a term loan with low initial payments, or, if your creditor really believes in your future, to trade 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 are taking the hard steps necessary to return your business to profit; consider opening your books to show them.

(Again, agreeing to sign a personal guarantee is probably unwise, especially if you have valuable personal assets and your business may fail anyway.)

Cut Back on Insurance Expense

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 may 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 are a sole proprietor or partner and therefore personally liable for business losses.

Also, if your business is co-owned and you have established a buy-sell agreement to allow surviving owners to buy out the deceased owner's inheritors, you might have also bought a life insurance policy to provide funds for the purchase. If so, consider canceling this policy, and if you have had it for a while, pulling out its cash value, if any.

Also see our article on how to create more cash to help your cash flow.

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