How do you cut costs in a recession?

There are several things a business can do in a recession to protect the bottom line, although some may have negative consequences for the long term. The first issue is, are you are aiming to down-size or are you looking for temporary measures that will help while you wait for sales to pick up again?

If you are down-sizing, then think – like GE - about what parts of the business you could most easily sell or close down, and what parts of the business you want to keep for the long haul. If the business is large enough, you may have loss-making divisions: these should be moth-balled at once.

If you are trying to maintain capacity, you need to look at discretionary costs that are not essential to stay in business. These are things like advertising, research and development, staff training, long term maintenance which are important in the long term but can be suspended temporarily.

Cutting advertising is potentially dangerous but, if customers are sitting on their hands because of the recession, this should be looked at. Cutting research and development will have long term consequences for the evolution of the business, but much of the expenditure, including the launch or trial of new products goes straight through to the bottom line. You should ask yourself if it could be deferred.

A cash conserving tactic is to defer routine capital expenditure. Supposing your policy is to renew your computers every three years, you could keep them longer. This keeps cash in the company and may also benefit the bottom line if they are already fully depreciated.

Finally, a delicate question is what you do with your staff. Loyalty and quality of service from staff is not helped by making them redundant! One possibility is to suggest they go on to a three- or four-day week, or take three months off, as have the Financial Times and KPMG in recent weeks. It is difficult and expensive to rehire staff when – and if - the boom times return.

Find out more

Managing costs is discussed in more depth in the courses Masters in International Finance and Management and in the Certificate in Accounting courses