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 Cutting the costs under pressure


 What is the sequence of events when a business starts to buckle under financial pressure? Though the details can differ depending on the situation and who the entrepreneur is, there are certain stages that businesses could experience when they face the crunch.

​​The first stage is that of hope, that tomorrow things will be better and this is just a passing phase. If we are patient things will right themselves. But then the pressure mounts, the cash flow deteriorates and a plan is needed.

The natural next step is to extend the existing credit limits to the extreme, which often includes overdrafts, suppliers’ credit and credit cards.

If those options become exhausted, the next logical step is to access reserves such as savings accounts, the trust’s liquid assets, the share portfolio, the investment in the wife’s name, even those special “rainy day” investments that only a few knew about.

The desperate stage follows, where the entrepreneur endeavours to turn longer term assets into cash. A second house, a beach cottage or an investment property is now on the market with only a few buyers jumping at it. Also on the list are the nice to have toys: the jet-skis and ski-boats, the extra 4×4, not to mention the private aeroplanes that should have increased in value.

Soon the bank puts pressure on the payment of the bond and outstanding debt for those expensive vehicles you purchased during better times. Do you sell them when nobody wants to buy them?

What is left besides the kitchen sink? Not much.

By now the entrepreneur should have introduced cost saving measures, but at this stage it is only trimming the fat. More desperate measures are required now, and often the first cut is marketing. But when sales are down is this move justified, or should the marketing angle and spend rather be revised?

When the entrepreneur evaluates this position, the reasoning is often elementary and justified by the statement “I cannot improve the sales so I need to cut the overheads”. In many instances, the salary and wage bill are a material part of the total overhead, and so the logical step is to address that.

And this is where I come to the crux of the matter. Just as all of the measures mentioned above should be considered, so too should you consider the matter of staff.

When the subject of staff is on the table, the issue of cutting costs becomes more complex. To begin with, emotions that weren’t there before come into play. Unlike an asset that, while it may have sentimental or status value, is simply sold off, staff issues are emotional and complicated, which is why many entrepreneurs avoid the issue.

It is also a costly exercise and one where the character of the entrepreneur is tested to the extreme. It is a challenge to make a decision on staff well-knowing that it could affect the business in the future. The skills you give up now could cost more when you need to regain them in time to come.

The fact remains, when the crunch comes, you may be forced to react. Revisit the business model and consider the options mentioned above. Just think it through properly before you make a decision.

This article was written by Gerrie van Biljon, 





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