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Cost reduction strategies for businesses during COVID-19

Opinion & Analysis
Cost-cutting is a prudent strategy for businesses struggling to survive the COVID-19 economic impact. Many companies are now working to adapt to a “new normal,” which is not normal at all because many companies are being forced to operate differently from the way they used to. As the pandemic is showing no signs of slowing down, many businesses are experiencing a serious decline in revenue, and are forced to rethink their spending in order to stay afloat. To keep your business afloat during the COVID-19 pandemic, you will need to cut costs as critically as you can.

guest column:Emmanuel Zvada

Cost-cutting is a prudent strategy for businesses struggling to survive the COVID-19 economic impact. Many companies are now working to adapt to a “new normal,” which is not normal at all because many companies are being forced to operate differently from the way they used to. As the pandemic is showing no signs of slowing down, many businesses are experiencing a serious decline in revenue, and are forced to rethink their spending in order to stay afloat. To keep your business afloat during the COVID-19 pandemic, you will need to cut costs as critically as you can.

Exhaust all cost-saving options Organisations need to approach the COVID-19 pandemic creatively, seeking ways to trim costs and address the impact of the coronavirus at the same time balancing the welfare of their employees with keeping their businesses afloat. Overwhelmingly we are seeing some companies putting their people first, and exhausting all other cost-savings options in order to retain their talent while staying solvent. It should be known that in a crisis like this which can be temporary, those organisations that put workers first in a crisis will keep their support in the future.

Instead, organisations need to approach the COVID-19 pandemic creatively, seeking ways to trim costs and address the impact that coronavirus may have in stages. Here are some cost-optimisation tools and other measures that may help organisations:

The first cost-cutting tactics/options

Remove non-essential expenses

I have seen countless companies, both established and start-ups which fell victim to overspending. They do not seem to realise this sometimes because of the illusion that they are earning enough. They do not see the expenses that they are incurring simply because they are still earning. During your financial assessment, you would have made three expense lists (fixed, variable and periodical). From these, begin to remove non-essential expenses. If it doesn’t contribute to the core of your business, remove or cancel it.

Streamline your budget

Much like making budget reductions at home, a business should review its monthly and quarterly budgets to determine if there are ways in which it can cut costs and increase the bottom line. If your business does not use a budget to forecast costs, it is time to start. A good starting point is to review two to three months’ worth of checking account statements.

Categorise spending based on expenses and create a basic budget. Once the budget is in place, review it at least quarterly. Project future spending and review the actual spending to ensure that overspending is not occurring in any category.

Reduce excessive costs

Operating costs are those required for the day-to-day maintenance and administration of your business. Operating costs also commonly referred to as operating expenses. As a business, this means that you need to be constantly monitoring supply costs by looking for discounts and investigating alternative sources. Improving your operating costs means putting yourself ahead of your competition. During this pandemic, organisations should always be looking for ways to reduce their operating costs without sacrificing the quality of their product or making the lives of their employees more difficult.

Lower your office space costs

How much are you spending on rent, electricity, water, internet connection? Are you fully utilising the entire space that you rent, or just a portion of it? Do you really need to be on the ground floor of the building? If you think that your space is a bit too much, why not consider renting a smaller and cheaper one to reduce costs? Renting a space that is the right size will help you avoid extra costs. Depending on your business and area, you may be able to take advantage of depressed prices for office space to move your business to less expensive quarters or negotiate with your existing landlord for better lease terms especially during this pandemic. If you do not really need to run your business from commercial premises, why not operate from home or go mobile?

Negotiate supplier agreements

Organisations can seize the coronavirus pandemic as an opportunity to introduce clauses in their contracts that allow them to renegotiate supplier agreements and obtain more favourable terms. Negotiating the right deal with your suppliers doesn’t necessarily mean getting what you want at the cheapest possible price. You may want to negotiate other factors such as delivery times, payment terms or the quality of the goods.

Most business owners view a good deal as one that meets all their requirements. But there are many other factors to consider such as whether you want to do business with a particular supplier again. Both sides should conclude negotiations feeling comfortable and happy.

Optimise on your processes

Look at your business strategy as a whole and try to simplify it. In many organisations, costly and complex processes are often overlooked simply because it’s easy to keep doing things the same way. Now is a good time to give these processes a fresh look, determining whether it’s possible to either deploy new technologies or restructure and redeploy the roles involved in these processes. Companies need to shift towards maintaining business operations, inspiring buyer confidence by adapting their strategies to stay relevant in their target markets virtually using technology.

Engage in targeted branch closures

If a company has an operation or plant that is underperforming, now is the good time to consider to shut it down. When firms intend to close stores, they typically shut down unprofitable ones and this allows them to refocus resources elsewhere. The decision on whether to close a branch is one of the most complex issues an organisation will face. Branch closure obviously affects the clients of the closed branch, it also affects surrounding branches, and may have repercussions throughout the organisation and the communities. There are two primary reasons why organisations may consider closing a branch: poor performance as measured by financial statistics such as balances or income; and proximity to other branches.

Reduce your staff

Coronavirus is an unconventional crisis, and businesses will need an unconventional response to avoid massive layoffs. Overstaffing will cost you more than just monthly salary expenses, hence there are questions business has to ask to be able to find the solutions. How many employees do you have? What are their functions? Are they really busy the whole day, or are a greater number of their working hours just spent on social media?

Take a look at your employees and see if you have the right numbers. Employers should make sure that they share the pain with the employees since COVID-19 is a crisis. It is advisable to start by reducing contract or temporary employees.

Pay cuts

Employers may consider a salary cut in an effort to ensure that it does not retrench any of its employees. This, however, will need to be negotiated by both parties. Make sure you have the right size of employees. If you see that they are all operational, but still contribute a lot to costs, cut the salaries to avoid layoffs. In the event that an employee is not agreeable to new employment terms he or she can opt to resign and this will have to be done in terms of the law and the employee will be entitled to an exit package which may be taxable. Pay cuts reduce labour costs, hoping to preserve the workforce for fast recovery.

Retrenchment as the last option

In these uncertain times during the national lockdown caused by the COVID-19 virus, employers may be struggling to keep their normal operations going. This may lead to employers having to consider the possibility of retrenching certain employees. However, retrenchments must be considered as a last resort.

It is important to note that retrenchment is accompanied by retrenchment packages hence the employee cannot just go empty-handed.

Companies will have to comply with the Labour Act (Chapter 28:01) which details the guidelines to be followed upon carrying out retrenchment. Nevertheless, employers really need to consider and contemplate all alternatives that may be available in reducing costs instead of rushing to retrench.

The longer this COVID-19 saga continues, the higher will be the economic pressure, and the tougher it will get for businesses and employers to sustain themselves to stay commercially viable. Tracking and measuring the operational efficiency of your business, in order to adjust and optimize the use of available resources is needed during this time.