2021 Budget: 3 Ways to Reduce Costs

It’s here. Budget Season.

As the days count down, the business world is faced with the persistent problem: how to keep their heads above water as businesses struggle to operate at 25%-75% of capacity. Despite the stimulus packages provided by the government, business in 2020 was just one of the casualties of COVID.

These unprecedented times produced unprecedented figures. According to a survey, unemployment rate in February started at 3.5%, but in April that figure soared to 18% — that’s an increase by five-folds! Based on another study, Yelp’s Economic Impact Report reveals that around 60% of business closure is now permanent.

These are just some of the surveys conducted that reflect how deeply the business world has been scarred by this pandemic. The conditions we found ourselves in the year of COVID will most likely hound us for years to come. Under those circumstances, the struggle next year is to formulate a budget plan that will withstand these prolonged challenges and solve some financial burdens we took on this year.

This budget season will be the true test of cost-cutting expertise, it will be an incredible feat of cost reduction. This task will create a problem since every year the budget cuts have made some operations as lean as it could go.

When it seems like there’s nothing left to cut, this is when you bring out the big guns, and by big guns, I mean your accountant. In this article, we will talk about 3 levels of budget-cutting strategies.

We are going to Marie-kondo next year’s budget plan.

Step 1: Cleaning out the closet

The easiest strategy for budget cuts is an across-the-board cut. However, this is not advisable since it gives no direction to the company on what to cut and where. This method punishes the most efficient department since they would already be pretty lean. The better strategy is to identify targeted cuts. The first step is to clean out the closet. Start with the most cluttered, or in this case, the most obvious.

Expenses that are not revenue-producing

The most obvious step is to start with expenses that don’t generate revenue. These include meals and entertainment, travel allowance, continuing education, representation allowance. Any expense that is not directly related to making revenue.

Revisit Recurring Expenses

The next category to look at is variable expenses, especially recurring expenses. One of the ways to cut costs is by doing these tips.

Switch service providers for your internet, phone, or cable. Be on the hunt in the market for better offers. If your provider doesn’t want to lose some business they will most likely offer better terms.

Revisit merchant services because you could be paying for redundant services. You should consider transferring to another platform that can provide you with virtually all your needs. A one-stop merchant can streamline your process and save you a couple of bucks.

Withhold Salary Increases

Don’t be afraid to withhold this year’s salary increase. In a pandemic when the national unemployment rate is on a high, your employees will be open to negotiations. It’s better to retain a job than insist on a raise that they know the company can’t afford.

Step 2: Looking through fresh eyes

The next level requires severe cost cuts which are coupled with a second look at their business process.

Eliminate low earning service

Some businesses offer a diversity of services, some of which become costly and useless. This is the right time to reassess the services your company offers, are they profitable? If not, they should go. This allows you to streamline your workforce as well. The positions responsible for those services can be dispensed with or reassigned to better-suited roles.

Look at the complimentary service that you provide, you could eliminate it too.

Refinance Debt

This move won’t directly affect the bottom line, but it does influence cash flow, and that’s enough to include it in our strategies. Remember, a healthy cash flow suggests a healthy business. It means your business has enough cash to sustain itself.

Talk with your banker to figure out some strategy to refinance your debts for better terms, such as extending the period or acquiring more capital. Another way is to negotiate for lower rates by consolidating your debts.

Reassess your business processes

When did you last review your business processes? As businesses progress, most processes find additional costs to make their services more attractive. In the end, these often take on added costs. Now is the right time to find what can be automated.

You can isolate ineffective or unnecessary processes, you can eliminate it and reassess the people you have working on them.

Reevaluate Personnel

Speaking of people, it is the best time to reevaluate their performance. Leadership will often know who the bottom-performing workers are. You will have the opportunity to let go of these under-performers. You can always replace them with more eager employees.

Step 3: Beyond the company internals

Talk with your Landlord

During this pandemic, a renegotiated rent rate is a win-win for both you and the landlord. With all the travel restrictions, it is unlikely that new renters will be knocking on his door. If the landlord has to choose between an open space or renegotiated terms, in today’s economy, he would rather renegotiate.

Consolidate Responsibilities

Contour your workforce. Jobs that were created for convenience can easily be consolidated to another. For example, if you have 5 sales managers, a stunted business requires you to consolidate some responsibilities. You might need to cut down to 3 or lower. The important consideration is the maximization of an employee’s productivity.

Snuff-out the competition.

The last point seems a bit drastic. It’s a Machiavellian approach in budget-cutting. It is said that the best way to retain business is to buy a competitor.

I know, I know. Throughout the article we discussed how the economy is really bad, buying a business should be far from our minds. But, hear me out.

When you buy out a business, you wouldn’t need to reduce your people because now, you don’t have to compete with another business for customers. Further, you can actually find some efficiencies between both businesses and consolidate your processes.

In the end, it benefits you both. You are merely taking away a burden on a competitor who is no longer confident about facing the long-term effects of this pandemic. If you have a better hold of your affairs, you should take advantage of this current situation.

The last step, ask yourself: does it spark joy?

The Marie Kondo Magic of Tidying-up, states, if you are going to keep an item, you should ask yourself, does it spark joy? If it does, keep it.

Does this department spark joy? You should give yourself the most time to consider this question. This means you should start your budget planning as early as possible.

Starting your budget planning early will always afford you the opportunity to make your decisions based on your needs and not be pressured to jump on the budgeting bandwagon on the latest and best way to budget. Or worst be placed gun-point by your vendor or landlord.

Don’t let your landlord dictate if you should keep your space. Don’t let your merchant vendor blind you with offers that could prevent you from seeking other contracts with better terms.

Getting started now will avoid any indecisions caused by these trends. You don’t want to be forced into a business deal you don’t want.

You already know what your business needs and your finance team will guide you through the budget process. Now, go make that budget.