Business Permanent Cost Reduction Strategies
How to Cut Company Expenses over the Long Term
Jul 29, 2009
When a business finds itself in financial difficulty, it has two options to turn around the situation, either grow revenues or reduce expenses. Revenue growth is often outside the control of management, and the decision to spend money can be made internally.
Short term measures can work during a crisis, but if a company is losing market share permanently, if there is a prolonged recession, or if the industry is in decline, effective long term solutions are required.
Reducing Salary Cost
For many companies, salaries are the largest component of expense. To reduce salary cost, companies need to cut the number of hours worked or the amount paid out per hour.
Strategies include:
- Overall headcount reductions: Lowering the number of full time equivalents will help reduce cost over the long run. The cost for each person includes salaries worked, but also benefits and training.
- Elimination of duplication: Especially in management positions, duplication creeps in when a company is growing, and combination of administrative areas can result in savings.
- Reviewing additions to wages: Some industries used on-call payments, subsidies or shift pay, which can increase wages overall. Eliminating or reducing these incentives, either through a union negotiation or annual review can cut salary cost.
Companies will often reduce incentives at the same time they give an annual increase, softening the blow of the reductions. Benefit reductions can also be done at this time.
A strategy that is NOT effective is the elimination of vacant positions. Companies will try to get some public relations value from this tactic, but a cutting a position that is empty saves no expense.
Benefit Expense Reductions
Cutting employee benefits can impact profitability in a major way. When it comes to health insurance reduce benefits or increasing employee co-payments will cut premium expense, or requiring additional employee contribution will result in immediate savings.
Companies can reduce future pension expense, or cut 401K match. Reducing sick or vacation time saves money over time. Improving processes regarding workers compensation may have a positive long-term impact, even though cost may be greater in the short run.
Other Long-Term Saving Strategies
The process may take years, but substantial permanent savings made be obtained by closing entire facilities. Disposing of a building will reduce any costs in maintaining it, as well as utilities.
Reducing the number of facilities will also facilitate consolidation efforts. There may be profit generated from the sale of facilities, but in some cases, it may be worthwhile to demolish existing structures.
 |
