Our Prime Minister has announced extension of the lock-down until 3rd May. The government will start allowing some activities from 20th April, in the areas which are virus safe and have no cases. Experts believe that lockdowns will start getting relaxed and gradually allow more activity. However, we all will have to be cautious before vaccine/medicine is invented. Therefore, subdued activity may continue for at least a year. Consequently, demand for most of the goods and services will stay at reduced levels.
This is a time when taking a hard look at your costs is critical. Generally, cost optimization takes a back seat when the focus is on growing the business. However, I believe, for most of us, the focus will shift to survival of business before we look forward to growth again. In fact, optimizing costs right now will strengthen your chances to capture disproportionate growth and market later when the crisis is over. A gap left open by failure of inefficient businesses will need to be filled by efficient and strong businesses. You must prepare your business right now for the opportunities that will arise later. In fact, after the 1918 Spanish flu, the world experienced one of the biggest spurts of economic growth. It started in 1920 and continued until 1929.
Therefore, in this writeup we are discussing the need to review all your costs and try to reduce them as much as you can.
Begin with writing down your sources of costs – Cost of goods, rent, interest, salaries, power and fuel, printing and stationery, freight, legal and consulting costs, advertising and marketing, travelling and conveyance, leases, AMCs and others.
Categorise them into significant and non-significant ones for your business. You can also classify them into fixed / variable costs or direct / indirect costs. Whichever way it makes more sense to you and your business. Now look at the significant costs. Can they be reduced or optimized? For example:
- Rent costs: This is one of the most significant cost for most of us. Businesses all over are questioning their rent costs and are trying to re-negotiate them. Start by looking at your agreement. Does it mention about any relief during unforeseen circumstances? Look at a ‘Force Majeure’ clause in your agreement. It is generally placed towards the end of it. Of course we are not suggesting you to get into legal battle with your landlord. Just be aware that if there is any such clause in the agreement, it will help in negotiation. Otherwise, depending on your relationship with him, you can try to negotiate other arrangements:
- Simple rent cuts: I am sure most of you would have already attempted it or have thought about it. Depending on the financial position of the land owner and your relationship with him, a rent cut can be negotiated for some months.
- Providing incentives for significant rent cuts: Like in case of salaries, you can brainstorm an arrangement to provide incentives to landowner later in lieu of significant rent cuts right now. For example – reducing rent right now and providing a share in the revenue/profits when business reaches pre-corona scale. We know a couple of businesses who have entered in such kind of arrangement. Or allow for higher escalation in the rent when the business reaches pre-corona scale, for reduced rent right now.
- Other options:
- Shifting to co-work spaces: You may also take a look at co-work spaces for your staff. These offices charge you by the number of seats your team occupies. If you expect your team to get smaller, then you may consider shifting your office in co-work spaces. They might turn out to be cheaper.
- Exploring work from home: Another option is exploring ‘work from home’ option for your team even after the lock-down is lifted. That is if your business can afford. You will have to invest in laptops and internet bandwidth at employee’s place. You will need your team to adept to certain online tools for video conferencing, transferring files and documents, communicating regularly in teams, managing workflow, etc. Its only about figuring them out once. The whole team may physically meet once or twice a week for face to face discussions. This meeting can be done anywhere depending on size of your team – conference halls, someone’s house, café’s, co-work spaces, etc.
Similarly, review your other expenses. Like:
- You may consider reducing your advertising and marketing budgets for a short time.
- Reduce your travelling expenses even after the lock-down lifts. You may want to meet your most important business partners for a face to face discussion. But for others, try to do meetings through video calls as much as possible. The whole world is getting used to video calls for meetings. You might also benefit by it.
- Software development expenses: If you were getting a custom MIS built for your team, then perhaps it is a good time to look at ready options available in the market. They may turn out to be cheaper than custom development. For example, there are various applications for Indian SMEs now that you can try for free. Like for customer service, payment gateways, sales monitoring, payroll processing, attendance monitoring, workflow management, team management, etc.
We have already discussed in our previous writeup, how salaries costs could be reduced, if required. Brainstorm, how other costs can be reduced? Talk to your vendors. Perhaps they have entered some cost reduction arrangement with others that you can also consider. Eliminate any expense if it can be dispensed off.
At this stage, for your significant costs, it might also be a good idea to look at your vendor’s financials. We will cover the need of doing that in our next writeup and how that information can be used.