Mazars: Targeted Cuts for Efficiency and Growth

by Kenneth Morrison and Annie Chan, Mazars, 15 September 2009

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topics:
Business Expense Management Finance and Banking

tags:
Annie Chan cost cutting efficiency growth Kenneth Morrison Mazars

The global economy has been severely hit by the financial crisis which commenced in the second half of 2008. Some companies have closed manufacturing plants while others have undergone corporate restructuring. General Motors, Chrysler and Reader’s Digest filed for Chapter 11 bankruptcy protection and Lehman Brothers even suffered bankruptcy.

The message is clear: companies need to use every means to survive in this unfavourable market situation.

Cost cutting is the preferred choice for most companies, not only to remain viable but also as a means to gear up for future growth. Reducing headcount is one of the most common strategies that have an immediate but short-term effect. However, it may adversely affect morale and can limit the ability to capture the growth opportunities that arise when the economy recovers in the future.

In some companies, salary deductions or “no paid leave” have been introduced, whereby a certain percentage of staff salaries are cut or staff members are encouraged to take leave without pay when there are not sufficient tasks for the staff to work on. Although salary cuts and unpaid leave are a way to retain staff, morale and motivation can still be adversely affected. They are definitely not a long term solution to the problem.

Focus on Cash

So what are the best ways to cut costs for growth and efficiency?

During an economic downturn, cash is king. Cash flow and financial flexibility are the key and crucial to sustainability. Managing cash flow can be challenging for the enterprises during a financial crisis. Cutting costs while maintaining current operations levels is often a significant matter to be tackled by the management.

We at Mazars realise that every company faces its own challenges during a downturn, depending on the actual operations. There can be different solutions depending on the size and nature of the business.

For example, smaller businesses have less access to financial resources, but their smaller scale enables them often to be financially more flexible. Cost cutting strategies like simply switching off lights and copiers to reduce energy consumption can be helpful measures.

Cash flow management can be critical to the survival of businesses. In this financial crisis, we are seeing companies deferring payment to their suppliers and negotiating better prices and credit terms. They know that a strong cash position is crucial in enabling them to be more flexible both financially and operationally during an economic downturn.

There are several ways to help companies improve cash flow, manage working capital better and also bring down costs. For example, companies can optimise their inventory levels so that no unnecessary or excess inventories are stored. They can also manage creditors’ payments more effectively by closer monitoring of repayment periods of creditors’ balances.

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