The Art of the Lean Startup: How to Reduce Operating Costs and Stay Competitive During a Downturn
To ensure profitability in the worst-case scenario, businesses must first examine their costs and look forward to cut operating cost.
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Companies in normal economic scenarios frequently take a top-down approach, beginning with a revenue goal and working backward to their budgets and operating plans. However, in the midst of a highly volatile economic crisis, revenue forecasts are no longer reliable.
To ensure profitability in the worst-case scenario, businesses must first examine their costs. This bottom-up approach to planning necessitates difficult decisions and discipline, but it may just save your company when times are tough.
Here's a guide to cutting operating costs during an economic downturn:
1) Review and Adjust your Yearly Budget
Begin with a detailed financial report. Creating a baseline of your revenue and expenses can help you identify any budget leaks. It's easier to cut operating costs once you've identified the gaps in your spending. Make a list of potential worst-case scenarios so you're prepared for anything.
When adjusting your annual budget, keep current market conditions in mind. Keep an eye on market trends and consider their long-term implications.
Determine a specific target for lowering operating costs. Then you can start evaluating cuts to preserve your runway.
2) Tighten Budget and Update your Perks and Benefits Framework
Perform a thorough audit of all costs to determine where they are coming from. This should give you an idea of which expenses can be cut and which should be eliminated.
For example, if you have relied heavily on paid advertising and expensive tools to generate leads, shift your focus to organic methods.
However, one of the most important areas to consider cutting back on is employee perks. Examine your employee perks and benefits framework for ways to cut costs while maintaining employee morale.
It may appear to be a risky move (given that these perks are major performance drivers), but during an economic downturn, items can be reduced or eliminated as employees prioritize job security. Just make sure to include them in the decision-making process so they feel a sense of ownership over these changes. Conduct surveys to determine which perks to keep, suspend or eliminate entirely.
3) Create a cash flow projection to ensure business continuity
Create your 13w cash flow forecast, taking into account all upcoming Accounts Payable and anticipated Accounts Receivable. Businesses should ideally have an efficient invoicing system in place to manage cash flow. If you have a history of falling behind on invoicing, now is the time to fine-tune your invoicing system. If you are navigating an economic downturn, you must have control over your APs and ARs.
4) Condense your cash conversion cycle
After you've identified all upcoming APs and ARs, it's time to improve your working capital.
Request that vendors push invoices without penalty and/or split payments into smaller amounts, and encourage customers to pre-pay by offering discounts. This can help you move cash in faster and shorten your cash conversion cycle significantly.
Using Venture Debt, SBA Relief loans, and vendor discounts or offers can also help you get more money rolling.
However, having these conversations during a downturn when activity is declining significantly across almost all industries can be difficult. Create a sales guidance plan for each situation that is aligned with specific response segments.
5) Communicate your cost adjustment strategy across your workforce
Budget changes and cost cuts are likely to cause confusion and fear among your employees, especially given the current economic climate.
Hold a company town hall meeting as soon as possible. When making the announcement, remember to include the following:
Reason for budget changes
Employees will most likely understand why budget cuts are necessary, but communicating the reasons will help to reduce uncertainty and eliminate any doubts about the company's financial health. Explain why you're making the cuts now and what you're trying to avoid in the worst-case scenario.
Updated budget plan
Present your revised budget to the team, emphasizing transparency throughout the process. As you navigate your organization through a difficult period, this will help to build trust and encourage your employees to carry their own weight.
Moving forward
Security concerns will undoubtedly arise. There is no way to know what the future holds, and you cannot promise what you do not know. Recognize their fears while also focusing on the positive. Strong, well-thought-out goals can eliminate, if not alleviate, these anxieties. Present your short- and long-term goals, as well as what is being done to ensure that your company is better prepared if another economic downturn occurs.
To ensure business continuity, it is necessary to adapt to unexpected downturns. When confronted with a global economic crisis, you should prepare for the new normal and plan your steps so that you emerge stronger on the other side.
FAQ on Reducing your Operating Outflow
Q: What are some ways to reduce operating costs during a downturn?
There are several strategies that businesses can use to reduce operating costs during a downturn, including:
- Reducing expenses by cutting unnecessary or non-essential spending
- Negotiating lower prices with suppliers and vendors
- Streamlining processes and automating tasks to increase efficiency
- Outsourcing or offshoring certain functions to reduce labor costs
- Implementing energy-saving measures to reduce utility costs
Q: How can businesses identify areas where they can cut costs?
One effective way to identify areas where you can cut costs is to conduct a thorough analysis of your business's financial statements and expenses. Look for areas where you're spending more than you need to, or where you can find more cost-effective alternatives. You can also consider consulting with financial advisors or industry experts for advice on where to find cost-saving opportunities.
Q: Can reducing operating costs negatively impact the quality of a business's products or services?
It's possible that cutting costs could lead to a decline in the quality of a business's products or services. However, with careful planning and strategic decision-making, it's possible to reduce costs without sacrificing quality. For example, rather than cutting corners on materials or labor, businesses may be able to find cost-saving opportunities through more efficient processes or by using technology to automate certain tasks.
Q: Are there any long-term consequences to reducing operating costs during a downturn?
Reducing operating costs during a downturn can help a business weather financial challenges in the short term, but it's important to carefully consider the long-term consequences of such actions. For example, if a business cuts costs by laying off a significant portion of its workforce, it may struggle to rebuild its operations and customer base once the downturn is over. It's important for businesses to find a balance between short-term cost-cutting and long-term stability.
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