First do a cash-flow analysis. Then consider cutting benefits, mandating furloughs, and negotiating lower rent with your landlord, among other measures
As the recession continues, many small businesses are looking for ways to cut costs to meet their budgets. Although employee expenditures can be among the largest companies' face, there are alternatives to layoffs, says Michael Eisenberg, a Los Angeles accountant and member of the National CPA Financial Literacy Commission. He spoke recently to Smart Answers columnist Karen E. Klein about alternatives to downsizing. Edited excerpts of their conversation follow.
So many small firms are hurting right now, with sales down, credit still tight, and money short for essentials like inventory or even payroll. If they don't want to institute layoffs, what do you suggest to business owners in these situations?
Employers should look at their cost structures and see where they can cut before they have to get to employees. Rent, inventory, and payroll are typically the largest business costs, but there may be other areas where cutbacks could occur.
For instance, they might be able to reduce spending on business promotions or advertising, gifts, taking clients out to the theater, ball games, or sporting events, those sorts of things.
Isn't it especially important to continue marketing efforts and customer relations right now?
It's always really important to keep that contact with clients, but maybe there are cheaper ways to do it. You might use e-mail alerts, or find out if your customer has a favorite charity where you could make a donation. Ask your employees to talk up the business and be rainmakers for you, then let them share in the rewards if they bring in new business.
Another area is travel. I absolutely believe that face-to-face meetings are important, but maybe you don't need to have so many this year. Do more with phone calls and e-mails. Depending on the company, you might explore video networking online and other technology that could save a lot on expenses like travel, hotels, and food on the road.
Is there a systematic way to go through a company budget and find costs, maybe even hidden costs, that can be reduced?
Yes. I recommend that the small business owner sits down with a CPA and goes through a cash flow analysis looking for what can be cut and in what areas. The owners should not try to do this all by themselves. The more eyes and ears you've got looking into the problem, the better, and the more likely you are to find other categories that can be cut.
Even though you'll be paying fees for the help, in the long haul you'll be better off with two or three people looking at the facts and figures and coming up with various ideas.
What other alternatives are there to employee layoffs?
If the business is renting or leasing space, think about talking to the landlord and getting a rent abatement or adjustment. Lots of people are in this situation, so this is not a time to be embarrassed to ask for these things. Perhaps you can upgrade your company vehicles, if you have them, and save on transportation costs. Or ask your insurance broker to increase your deductibles and lower your insurance premiums.
What happens when a business owner has cut back to the bare bones and is still having trouble. When do you resort to cutting back on personnel?
First, I tell business owners to look at their own compensation. Perhaps there are things you've been spending on that the business has been paying for. Maybe you could cut some of those expenses. Think about working longer and harder and pitching in to help more yourself.
It's like when somebody first starts out in business and has all this energy and will do everything imaginable to make it a success. Go back to that mentality and forget about playing golf. If you can set the tone of sacrifice and pitching in from the top, your employees won't feel as bad when they're asked to make sacrifices themselves.
How can the company structure employee work reductions?
As long as a reduction or a furlough is applied to everyone fairly, across the board and not targeting any particular group, it's really up to the owner's discretion. Perhaps some people could work four days a week and take off every other Friday. Or they could be asked to use up their overtime.
Many companies are doing cutbacks on benefits, whether it's discontinuing matching funds to the retirement plan or asking employees to chip in more for health insurance. There are many different ways to do it, and they will affect production and cash flow differently. So exactly how you implement this would be something you'd want to work out with your accountant.
How would a furlough be best communicated?
The owner should make the general plans before anything is announced, then lay out the plan for the employees. If you get 10 people in a room and start asking for advice, you'll get 11 different ideas. In this instance, the employer has to be a leader and be willing to take the heat, but give back a well-reasoned analysis of why it's being done.
You want to explain the lengths you've gone to trying to avoid it and say that the alternative is job loss. Tell them that you're protecting your employee base now so that when your company gets through this downturn, you'll all be better able to compete.
Of course, your employees should understand that everyone is going to have suffer a little bit for the good of the group. Small businesses really are extended families and no one wants fellow workers to be out of jobs. Emphasizing that is a good way to keep morale up as much as possible.