Making strategic expenditure cuts to stay afloat in 2017

2016 has been a challenging year for individuals and corporate entities alike, and even the government has not been spared. Series of impromptu cash cuts were implemented as incomes receded and people tried hard to stay afloat.

When the economy slows down, virtually every activity swings in the negative direction, and as experts have observed, only those intuitive enough to preempt the forthcoming hard times will be able to manage their businesses in the tough times.

Business owners should make deliberately planned and strategic efforts (rather than just random) in the reduction of business expenses by means of proper resource allocation and consolidation of businesses.

It is however also important that at the same time, there is no compromise with products or service quality to stay competitive in the market.

This year, recession came more or less unexpectedly and businesses had to spontaneously adjust to the emerging economic reality.

“We reduced the cost of operation or expenses at every opportunity, and we also negotiated prices with our buyers (beyond our usual approach),” said Olusola Soyannwo, CEO, Integrated Recycling Limited while speaking about how her company has managed its finances in the midst of an ailing economy.

Tunji Falade, CEO of Kingsway Quality Foods (Int’l) Ltd, who also doubles as the MD of Lagos Chamber of Commerce (Integrated Agriculture Project) LIAP said he has had to “Cut down expenditure generally, both in business and private life; undertook only very important trips and intensified debt recovery and reduced credit sales which happens to be an integral part of our operations to the barest minimum.”

“We also increased our sales channels, and intensified aggressive marketing of our products. There was little or no recruitment this year, but we juggled the staff where necessary. In addition we introduced more robust internal control system to plug financial leakages.

“We’re looking forward to a fruitful 2017,” he enthused.

Even individuals have not been left behind in getting creative (however controversial) in keeping their cash flow positive.

“I have been able to tackle the recession this year by participating in a number of online networking programmes to augment my income, because man must survive and one cannot steal nor do something unlawful. I see it in a way that I use little of my money to donate in a networking program then I wait for the return after few weeks,” said Jide Olanlokun who works with a paramilitary body in Oyo state.

According to the Chartered Institute of Management Accountants (CIMA), in general terms it is possible to identify three broad ways in which businesses might adapt during difficult economic conditions such as recession:

• Retrenchment strategies – this appears to be the most common approach adopted by businesses to deal with recessionary conditions and might involve cutting operating costs and divestment of non-core assets, especially in the short-term. Examples include: divestment of businesses, closure of plants, reductions in employment; cuts on a wide range of expenditure including R&D, marketing and training

• Investment strategies – this might involve expenditure on innovation and market diversification. Recession is regarded as an opportunity to implement strategic change that would otherwise not have occurred. Such strategies are risky and many firms are likely to be too preoccupied with short-term survival to think about innovation and growth, or lack the resources to implement such strategies effectively.

• Ambidextrous’ strategies – these combine retrenchment and investment. It is likely that most firms adapt under recession conditions through judicious cost/asset-cutting behaviour and through investment in product innovation and market development. However, business performance is highly variable under recessionary conditions, and no particular strategy can guarantee survival and success. Much depends on contingent factors such as, for example, business resources, relations with other stakeholder groups etc. Furthermore, business performance under recessionary conditions does not map closely on to organisational characteristics such as business size or sector.

Experts have also suggested making a conscious effort to keep track of cash flow. It is recommended that businesses endeavour to convert inventories into cash so as to remain protected during bad sale period, and try to reduce the stock as much possible compared to before.

Sourcing of products or services locally if possible is also key, more so in view of difficulties in access to foreign exchange, a decision which aprt from lowering the burden of sourcing forex will as well improve the local economy. Simultaneously, it is going to lower the cost of the supply chain system, for instance reduction in transportation costs.

It is also likely that many organisations consider cuts to marketing costs as part of their strategies in reducing expenditure. During recession, marketing has often been a prime target for cost savings, as the sharp fall in TV, newspaper and magazine advertising demonstrates.

However, no matter how squeezed a firm’s finances might be, it is vital for businesses to maintain a strong brand presence and to keep communication with customers.  Research shows that marketing spending reaps benefits in the long-term.

Viewing marketing as an investment puts it in the same category as R&D spending, or investing to improve or increase production capacity. In other words marketing needs to earn a satisfactory return on investment.  The problem facing the marketing department during a recession is that it is easier to measure the return on marketing spending.

Another good place to look for examples of cost optimisation rather than cost minimisation is the IT function in businesses.  ICT is still one of the biggest investments for any business, so it might seem to be an obvious candidate for the zealous cost-cutter. However, even the recession can’t slow down the relentless forces of change in IT, so a decision to cut back on IT spending is fraught with dangers.

Many firms have found that the trick is to spend smarter rather than spend less.  Two great examples come to mind.

The first is the rapid growth in the use of “cloud computing” – which involves using data storage and other facilities provided by third parties. This is effectively outsourcing much of the IT function.  If a business needs more server capacity or data storage, it simply rents it rather than spending big to buy and manage extra equipment.

The second example is the widening use of open-source software.  Software such as Mozilla and Linux have revolutionised the home and business computing markets – the beauty is they are free.  Open-source reduces costs, even if it doesn’t always come with the same level of service provided by some proprietary systems.

So, the economic downturn has forced companies to rethink the relationship between short-term costs and long-term profits.  The challenge has been to think not about how costs can be minimised, but about how to maximise the returns from costs.

CALEB OJEWALE