The Dos and Don’ts of Recession Cost-Cutting

The “will it… won’t it?” recession has been on just about every business owner’s mind for the better part of the past year. And if you’ve been keeping up with downturn-related news, you’ve likely seen countless articles on how companies and their operations and logistics professionals are preparing. Many of these focus on cutting costs, and perhaps for good reason. During a recession, consumers tend to have less spending money, of course, and when sales decrease, profits do, too. To counter this, the classic move is to scale back expenses, but there are critical factors to consider first.

Don that green visor

Break out that general ledger, drill down into your expenses, and see exactly where the money is going. According to a study by Motley Fool’s The Ascent, if you’re like four-fifths of Americans, you waste more money than you should.

So, analyze, re-analyze and get creative. You might be able to negotiate a better deal with a vendor and/or shop around for something more affordable, like new payroll software. As you do so, you’ll notice a common theme: Other companies would love to have your business, and will prove it to you with discounts and special offers. So, don’t be afraid to negotiate; the worst a vendor can do is decline.

Emphasize efficiency

If you keep doing the same things, you’re going to keep getting the same results, and during a recession, that can be deadly. So, just about any time is a great time to root out inefficiencies. After all, you’re spending good money on employee hours, and if these people are spending half their days on needless processes, well…

I’m a serial entrepreneur; my accounting software and payroll company, Patriot Software , isn’t my first business. At one of my past startups, a main objective became killing inefficiencies, and to do that I needed to understand everything my office manager was doing. So, for a few weeks, I pulled up a chair and paid attention.

When I heard typing on her keyboard, I’d lean over and ask, “Whatcha doing?” She’d explain, and then I’d perhaps offer something tactful like, “Let’s not do that anymore. Let’s kill that process.” Being a naturally friendly person, she’d smile and say, “Okay.” Thirty minutes later, I’d hear more typing, and would again inquire as to what she was up to. She’d explain, and again I’d likely respond with, “Hmmm… let’s kill that, too.”

I probably looked over her shoulder a hundred times. She’d politely explain her task, and I would usually not-so-politely say, “Kill it.” It got to the point where I could just look at her and she would be the one to blurt out, “Kill it!” This painstaking but invaluable process freed up her time for more important things.

Long story short: you and your team must be willing to root out needless tasks and try new things. Look at the business with fresh eyes, and focus on what doesn’t move the dial.

Take advantage of freebies

Savvy entrepreneurs know how to get free stuff . Even better ones know how to try things before buying. These skills are especially valuable in a recession. So, take advantage of all the “free” you can before, during and after an economic downturn. This includes things like:

• No-cost trial periods

• Word-of-mouth advertising

• Networking events

• Free continuing education programs

Taking advantage of these will save cash, certainly, and often include the chance to try before you buy, usually with no strings attached.

Pro Tip: Your customers might also be looking for free stuff during a recession. Try leveraging a free trial, service or product to help ramp up sales.

Cost-cutting moves to avoid

There are some classic blunders businesses make when responding to slowing sales or a generally unfavorable marketplace. In a panicked moment, they may seem prudent but are virtually certain losing moves.

Raiding the advertising budget

This is a regular, usually expensive and tempting target, but take my word for it, as well as that of the Small Business Administration (SBA): reducing advertising and promotional expenses usually isn’t smart. Its advice is to at least maintain, if not increase ad outlays to outmaneuver competitors that may be scaling back during rough times. This can help boost both sales and market share. Try offering discounts in these new ads, in the process calling attention to the economic downturn and how you are responding to it.

Of course, you also need to consider any company’s unique situation. For example, you likely wouldn’t want to borrow to fund advertising if cash is too tight. A high level of debt can make you especially vulnerable during a recession .

Relying on layoffs

Payroll is likely among your biggest expenses, if not the biggest. Salaries, taxes and benefits add up. But according to Harvard Business Review (HBR), layoffs are often more costly than cutting other operational expenses. In a 2019 article, it reported that they result in:

• Low morale

• Decreased productivity

• Higher hiring and training expenses after a recession

To be sure, for many businesses, layoffs are inevitable. That same HBR research considered this reality as well, yet still concluded that “…companies that emerged from the [2008] crisis in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements.”

Here’s the Twitter version: Don’t depend solely on layoffs to keep a business afloat. Consider taking other survival steps like shortening hours and cutting other expenses.

Future Tip: Avoid over-hiring in the first place. Boom-and-bust cycles are part of life — strong growth followed by sharp declines. This causes many to go through hiring crazes during highs and layoffs during lows, then back and forth again. The next time you’re in a boom, consider building a lean but adaptable crew instead.

Cost-cutting is just one part of the equation

My company offered a checklist of things companies can do to become recession-proof in a May 2023 article . Its advice includes:

• Maintaining a cash reserve

• Offering incentives to ramp up sales

• Offering payment plans to help struggling customers

• Communicating regularly with lenders and other vendors

The point is to put together a thorough plan — determine what strategies can help you best, including encouraging team members to analyze departmental processes to see what can be axed or streamlined.