The Art of Cutting Costs: Why Businesses Shouldn’t Wait Until the Last Minute to Cut Costs!
After a hiring spree during Covid, big tech companies have begun laying off workers. Google, Amazon, Salesforce, and Microsoft announced significant layoffs as early as January 2024. These companies are reducing their workforce as the pandemic boom comes to an end and are also preparing for potential revenue declines. For instance, Amazon doubled its workforce since 2020, along with its revenue. In 2019, the company had annual net sales of $280.52 billion, which soared to $574.78 billion last year. There's a valuable lesson for business leaders here: businesses shouldn’t delay cost-cutting until the last minute. It's crucial for companies to consistently try to reduce expenses, even in prosperous times.
A common mistake companies make is over-hiring during periods of growth and then rushing to lay off employees when business starts to decline. When experiencing revenue growth, companies often hire more workers to meet demand, but they need to ensure they're not hiring more than necessary. Finding ways to achieve more with fewer employees is key. Efficiently managing payroll expenses is critical for sustained growth. Companies should aim to hire as minimally as possible to meet new demand. By managing payroll expenses effectively, businesses can continue growing even if revenue slows down or the economy enters a recession.
By Faisale Shefawe
04/08/24 1:30 AM
Companies should also analyze their marketing expenses to identify effective and ineffective strategies for cost-cutting purposes. Even in favorable times, management must strive to manage marketing expenses and eliminate unnecessary campaigns. Not all marketing endeavors yield success, so the focus should be on retaining the most effective strategies and eliminating those with the lowest return on investment.
Another expense businesses should pay attention to is their Research and Development (R&D) spending. Apple recently disbanded its electric R&D division after investing $10 billion over 10 years. While it's crucial for businesses to allocate a portion of their revenue to R&D, they must ensure they're investing wisely in projects likely to shape the future and enhance competitiveness. Change is inevitable in every industry, so focusing on R&D projects with future relevance is essential.
During economic booms, another mistake businesses make is taking on debt for purchases or mergers. When the economy is thriving, banks and private credit companies readily issue loans for mergers and acquisitions (M&A), assuming business will always be good. However, business leaders must anticipate economic downturns. Studies have shown that 50-90% of M&As end disastrously. Accumulating corporate debt during prosperous times can hinder profitability and growth during tougher economic cycles, as companies struggle to repay loans while maintaining access to capital markets. It's crucial for companies to carefully consider the implications of debt before pursuing growth and expansion.
Sam Walton, the founder of Walmart, attributed the company's success to careful expense management in his book "Made in America." While focusing on growth and profitability is important, managing expenses in payroll, marketing, and R&D can help companies weather various business cycles. Additionally, companies should exercise caution before accruing debt to fuel growth. By making prudent decisions, companies can prepare not only for good times but also for the inevitable challenges that lie ahead.
