The Importance of Strategic Cost-Cutting After the COVID-19 Pandemic

When the economy slows and recessions hit, strategic cost-cutting is critical.

It’s not just enough to plan to cut costs when the going gets tough. Cuts have to be strategic — they need to be deliberate, intentional, and effective. And this is true when we consider the impact of cost-cutting during the downturn as well as the implications for during and after a recovery.

After all, it’s important not to throw the baby out with the bathwater. And while some people plan to just cut, cut, cut their way to profitability, strategic cost-cutting offers much better long-term company benefits than just haphazardly cutting costs.

There are a few concepts that you need to consider about costs:

— Is there low-hanging fruit worth grabbing for?

— Is enough value created by cutting certain costs?

— What will future costs be of any cuts?

There is no such thing as a free lunch, and every time costs are cut, there may be consequences. Cuts could adversely affect vendor relationships, staff morale, future competitiveness, and future readiness for recovery. This means that cuts in the present could reduce future long-term upside potential.

And that is something to avoid if possible.

In short, the best strategy when looking at cost-cutting, is to make sure that the juice is always worth the squeeze. Because each cut will come at a cost. And it’s important that cuts aren’t so deep that a company can’t recover from them.

Business Priorities in a Downturn

Companies only go out of business for one reason: They run out of money. This is why maintaining positive cash flow and being able to service debt obligations is critical in a downturn.

Fortunately, the equation of profitability is always the same, in good times and bad: Revenue minus costs equals profits.

As such, there are only two ways to boost profits: sell more or spend less.

In good economic times, the focus is often on driving up revenue. And companies are sometimes willing to overlook costs while the money is flowing in.

Travel and entertainment expenses, maintenance expenses, equipment expenses, overtime hours, and other labor expenses can rise significantly as companies rush to capture the upside from increased sales.

As my colleague Nawfal Patel likes to say, “People are too busy making money to ask why or how.”

However, during a recession or other economic or business slowdown, sales often fall. Sometimes sales stall altogether, as they did for many companies at the time this book was published.

Since increasing sales is tough — but cash flow and profitability are critical — business leaders will often turn their focus on cost cutting, as the only other way to support profitability.

Of course, this is very tough for some companies.

After all, high-growth companies — especially startups — often prioritize growth over profits. But these companies will face even greater challenges in a downturn, when sales fall and investor dollars could dry up quickly.

Such companies would need to find a way to become profitable after only ever having lost money. That could prove a tall task. 

But these companies are the exception, not the rule.

Fortunately, most companies survive day to day in good times and bad because they are generally profitable. And they do not show constant negative earnings living only on investor support.

The good news is that for the great majority of companies that usually show profits, it’s a lot easier to keep the money flowing and remain operationally sound in a downturn. After all, it is a lot easier to strategically reduce costs than it is to shift from losing money in good times to being profitable in bad times.

Companies that normally lose money face existential going concern risks during an economic downturn. And even those that are normally profitable can still face risks to their profitability — and their existence.

But their chance of survival is greater.

The trick is to keep the money flowing. Cash flow is life.

After all, the only way a business fails is if a company runs out of money and it cannot pay its bills or service its debts.

Strategic Cost-Cutting After COVID

This is an excerpt from Jason Schenker's recent book Strategic Cost-Cutting After COVID, which was released on 16 April 2020.

This book can be ordered at www.CostCuttingCovid.com 

Jason Schenker is one of the world's leading futurists. He is the Chairman of The Futurist Institute and the President of Prestige Economics. Jason is also an instructor for LinkedIn Learning.

Tags: #Disruption, #Technology, #Innovation, #LinkedInLearning, #SupplyChain, #Business, #Finance, #Economy, #Economics, #Coronavirus, #COVID19, #Jobs, #Work, #Leadership, #Negotiation