Cutting costs to save your business

This is part one in a three-part series on cost cutting and business restructuring in various situations. This article explores cost cutting when you are quickly and unexpectedly running out of money.

Maybe there has been a sudden change in market conditions, investment capital has been withdrawn or interest rates unexpectedly skyrocketed. Whatever the reason, your business is struggling to survive, and you need to start cutting costs -- and fast.

Even in a crisis it is important to have a strategy in place before you start making cuts. This article discusses priorities to consider, the challenges of cost cutting in an emergency and how KPMG firms may help in tough times.

In a time-is-running-out emergency, there are three priorities you should keep top of mind to help try to keep your business afloat.

1. Pay your people

If you stop paying your people and they walk off the job, you may as well kiss your business goodbye. Most suppliers and creditors build an element of bad debt into their pricing and financing and can weather a payment hiatus longer than employees, which is why paying your people is most important and should be a top priority in difficult times. Generally, it is inadvisable to cut from talent even in an emergency. However sometimes doing so is necessary to survive, like if there is a business unit or regional office that is burning through cash.

2. Buy time

When you are running out of time it is important to try and slow down the clock. Firstly, you can complete an all-hands-on-deck assessment of your business needs -- what should continue and what should be pulled back or stopped altogether. This includes determining which suppliers you most need to stay on good terms with (and doing whatever you can to make sure they continue getting paid), as well as which bills are essential. Cuts are easy to make and hard to take back, so make sure you fully understand the situation first.

Once your assessment is complete, you can prepare a rolling short-term cash flow forecast to help determine how long your business may survive. Next, consider tapping available sources of capital, including drawing down on existing bank loans if you can, and then alternative sources of capital such as from trade creditors, or reaching out to angel investors to help finance a turnaround or restructuring process. It is important to have a plan in place (even a rough one) and be ready to show would-be investors/creditors that you have acknowledged the situation, know your business' strengths and have based your proposal on a well-considered path forward.

3. Stay on the right side of the law

Keeping your business afloat is much like walking a tightrope. There is a fine line between what you can get away with to keep it going and the point at which your directors are at risk of going to jail for continuing trading knowing you are close to going broke. What that threshold is varies, so consider getting legal advice to understand which laws are applicable to your situation in your country.

As you start making these changes, it is inevitable that people will talk, and rumors may start. Determine from the outset who to tell and how much to tell them. Having a communications strategy in place before cost cutting begins can help you figure out who needs to know what -- and when they need to know it. Prepare for any questions or concerns your people may have, because just as things can rapidly deteriorate if you cannot pay your people and they decide to leave, the same can happen here if they feel you are not being honest with them.

The above sections have talked about buying yourself as much time as possible and determining how much of it your business has left. Think of it like performing triage -- you are managing issue after issue and must make decisions quickly and act decisively while under pressure.

Cost cutting in a crisis can understandably be a difficult process. Emotions will be heightened, which makes it important to have the right specialists around the decision-making table. During the process you need to be able to stop people's egos at the door and keep emotion out of your decisions as much as possible. To undertake a successful cost-cutting process, it is key to:

• Recognize that cutting costs in an emergency is making the best out of insufficient time and resources. It requires decisiveness, resourcefulness and the ability to prioritize effectively.
• Realize it is about rationalizing costs to survive -- in this situation it is like you are getting ready to perform emergency surgery. Cost rationalization can be thought of as the 80/20 rule, where 80 percent of outcomes or consequences come from 20 percent of the causes. It is not about optimizing costs (which is more like performing elective surgery).
• Act quickly and decisively. This is the time for action, not endless consultation. However, taking a dictatorial approach could alienate key employees. Consult just enough that the team is behind you, but not so much that your business goes under.
  

When your business experiences serious shock, you need action -- not generic insights and PowerPoint presentations. Tailored, sector-specific solutions that get around the office politics and recognize the unique context of your challenges can help you get through tough times and make difficult decisions. These lead to sound plans that take potential investors and creditors into account.

External consultants can bring value to your cost-cutting process because they are impartial. Their experience will give you a sounding board when balancing all the issues above.
KPMG Turnaround and Restructuring professionals have deep industry and sectoral experience, and the right mix of capabilities and specialties, to help in emergency situations. From aviation and retail to hospitality and technology, KPMG firms and professionals bring their extensive restructuring expertise to more than 25 sectors. Their aim is to help businesses stay afloat and recover.

Taking an honest look at the state of your struggling business can be challenging and emotional. But with the right external professionals and a plan to move forward, your business could see the light at the end of the tunnel.