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.
For sales and receivables, companies can consider offering discounts on condition of quick settlements from customers. They can also conduct more stringent checks on new debtors. Companies which have bank borrowings need to stay in closer contact with their bankers, keeping them informed of their financial and cash flow positions in order to avert tightening of bank credit lines.
For those companies with lease terms that are approaching expiry, office relocation might be a feasible option. More companies are moving their offices out of the traditional “core” business districts to some less central locations, or shifting their back offices to less costly or even industrial areas.
By doing so, significant rental costs could be saved, the scale of operations maintained and pressure on cash flow relieved. Given technical advances in computers and communications, office relocation is definitely a feasible option.
The Mazars Experience
We ourselves are undergoing a cost-cutting programme, but we are making sure that the reductions will lead to efficiency and growth, not simply to short-term cash conservation.
First, we looked at the two major areas of cost, which in our case are salaries and rental. As a professional services firm, our key assets are our people, so we decided against widespread staff cuts. That would have had a negative impact on employee morale and potentially pose problems with retaining the talent we want to keep.
Instead, we focused on office relocation as the better and more viable option for us. Relocation of office does not mean deterioration in the perception or competitiveness of the firm. As Mazars has expanded rapidly in the recent years, we have run out of space to cater for our expansion. By virtue of fortuitous timing, we have been able to lease a new office and now occupy a larger space at an acceptable cost in a good location which also allows room for future growth of the firm.
While we did not trim headcount or impose salary reductions, we took a hard look at the way we deploy our staff to ensure optimum utilisation of their time and capabilities.
Like other audit firms, Mazars has its peak and less busy seasons through the course of a year. Many staff members have to work overtime during the company reporting season or before the tax filing deadline, but the schedule is not as tight in other periods within the year. As professional audit staff are “multi-skilled”, being familiar with a broad range of accounting and tax related areas, we have redeployed some junior audit staff to other departments during the slack season to better utilise our people resources.
For example, some of our junior audit staff members have been assisting in a number of projects within our Tax Advisory Department. By means of such rotation, we can effectively allocate excess audit manpower during the slacker season to support other departments which are short staffed.
From the staff development point of view, such practice can give the staff a chance to explore and gain valuable experience in other services provided by the firm, which we believe will be beneficial both to their development and also that of the firm.
Another strategy has been to target specific areas which are seen as strategic specialist expertise areas in the current climate. As such, the firm has expanded its Corporate Recovery and Forensic Services Department and will continue hiring skilled talent from the market.
With assistance from the international network within the Mazars Group, management hopes that it can further expand its international client base and enable Mazars to become the preferred choice besides the Big Four in these specialised areas for both global and local clients.
Client relationships are another important aspect to be fostered by the firm during the economic slowdown. We have been keeping close contact with our clients so as to better understand their needs and to provide appropriate value added services accordingly. We believe that good client relationships are critical to the success of our business. By helping our clients navigate through the financial crisis, we are able to foster closer long term ties with them.
The above are some of the key solutions in effective cutting of costs for companies. It should be noted that cutting cost does not necessarily imply sacrificing growth or efficiency. For companies that want to achieve concurrent growth at the same time as saving costs, they can consider a thorough business review of their operations.
An objective assessment for the company’s operations, financial performance and asset deployment should be conducted. Management should determine if the operation is both efficient and effective, including whether appropriate methodologies and procedures are used. In addition, company management should focus, where possible, on producing fast and sustainable cash generating projects to maintain a strong cash position.
By freeing up sufficient cash resources, companies allow themselves more flexibility and can be more active or aggressive than their competitors when the economic situation improves. With good strategy and proper planning, those companies which may be smaller but more efficient can capitalize better on the opportunities that present themselves in this financial crisis and even gain market share from their bigger competitors.
About the Authors
Kenneth Morrison is managing director of Mazars Hong Kong. He is a Certified Public Accountant (Practising) in Hong Kong, a member of the Institute of Chartered Accountants of Scotland and a fellow of the Hong Kong Institute of Certified Public Accountants. Kenneth has an L.L.B. from the University of Edinburgh and has extensive experience in litigation support involving a wide range of financial and accounting issues.
Annie W H Chan is managing director of Mazars Corporate Recovery & Forensic Services. She has an L.L.M. from the University of London and is a member of the Institute of Chartered Accountants of England & Wales and the Association of Certified Fraud Examiners, USA. She is also a member of INSOL International and a panel member of the Financial Reporting Review Council. Annie has specialised in corporate recovery and forensic accounting for over 19 years.