The discussion in boardrooms across the globe is not mergers and acquisitions. It’s not the bottom-line either. That’s because sales and profitability do not count in a liquidity crunch. The only thing that matters is how much cash you have on the table. Let’s face it. It is downturn and ‘Cash is king’.
Cost cutting is the mantra. From pooling of vehicles to switching off fans and lights when not required and to slashing perquisites, everything is in. Every penny saved counts. Some IT and ITes companies who were doling out fancy perquisites to retain their young crowd a year ago have now even done away with the toilet paper!
The point I would like to make through this article is ‘It’s good to cut cost and be lean but for God’s sake don’t be mean’. It is during tough times like these that you need to look at innovative ways of ‘unlocking cash’ from your business.
Here are a few things that organizations can do:
Shift the focus on ‘Here and now’
Around this time two years back, companies were making blueprints for aggressive acquisitions and expansions. Nobody even raised an eyebrow while planning how to achieve 200% growth. Wake up. Times have changed. Forget 200% growth. If you can achieve 50% of your sales last year, it’s a worthy achievement. The sooner you realize this; it will do a world of good for your business. There’s no point in focusing on building wealth. Long-term goals can wait. It is a question of survival. It’s a war on cost. And when it’s war, we need to win the quick battles that can improve your liquidity in the next month and quarter.
Utilize the utilities efficiently
You can’t do much on the selling costs and the direct costs. It’s those silent fixed costs that eat away your cash. You can save good amount of money from just turning off lights and fans when not needed. Recycle used paper as scribbling pads. Print only when necessary. It’s not penny-pinching. It’s smart utilization of resources.
Dig dip into your vendor contracts
Are you effectively using your telephone, internet and annual maintenance contracts? Can you do with a ‘lesser’ plan? It’s time you call your vendors over for a heart-to-heart talk. They would be glad to accommodate you than lose business. Companies can save good amount of money overnight by digging deeper into their utility contracts.
Do you need that business tour?
The litmus test for that business travel is: will it bring cash within the next two months? If yes, can you travel in economy class? If possible, avoid the overnight stay and if it’s inevitable, how about a no-frills hotel. Every penny saved counts.
Listen to your ratios
Your financial ratios are your health report. They give you early warning signals. Is your Gross Profit Ratio at par with the industry? Is your Return on Investment enough to keep you afloat? How is your Debt-Equity ratio? Ratios don’t lie. Listen to them and act fast.
Is your pricing right?
Give a little thought to your pricing strategy and you could improve your operating margin by at least 5-10% Discounts to customers eat away into your profits. And so does too much of customization. You don’t have to service all the business queries and you don’t have to service all your customers either. Get your priorities right. Less business is better than bad business. Extended credit lines don’t bring cash on the table, at least not for the next few months.
Avoid the vicious debt spiral
You can’t service your costs and opt for debt funding. Then, you can’t service your debt and you borrow more. Don’t get into a vicious debt spiral in the hope that things would be better soon. It may sound harsh but it’s true. Scaling down is better than going broke.
Liquidate that ‘prime property’
It’s not the declining sales but the heavy capital costs that are doing businesses in. The property you bought in a prime locale for expansion is a sunk cost. It cannot give you any returns in the immediate future. Don’t let the emotions bog you down. Take a cue from the prominent real estate companies and sell some of your real estate investments and unlock the cash.
It’s time you think of outsourcing
Do you have to do all that you do in-house? Outsourcing is no longer relegated to a back office discipline in the business landscape. It can be strategically used to ‘free’ your scarce resources for your core activities.
Let them know what you’re going through
You know these are challenging times. But do your people know? Unless your people hear it straight from you, they wouldn’t know how bad it has hit you. It’s ok to share the bad news with your people. And it’s better if you can take their suggestions to cut costs. You need their buy-in to make things happen.
Perform or …. take a cut
In times like this, you can’t carry extra baggage of people who don’t perform. Let it be known to one and all in the organization. Tone down the ‘fixed’ component of the compensation and hike up the ‘variable pay’. Dole out good incentives to the high performers. For the non-performers, either they take a ‘pay cut’ or go home.
To sum it up, optimum utilization of resources is not only a good way to cut costs, it’s the street smart approach to business. Be it fixed assets, working capital, equipments, receivables or your people constantly look out for unlocking the idle potential and maximizing the return on investment.
A word of caution: Beware of reckless cost cutting. While cutting costs, think long-term. For every recession does end. This too would pass. And when things get better, you need to be geared up to make the most of it.
Srinivasan Iyer, CEO, MPower Business Facilitators Ltd, is a CEO coach and strategic management consultant to over 400 leading companies of India. You can write to him at srini@mpowerexcellence.com
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| Posted on:8/18/2010 at 7:20 AM