Non-payroll related reductions are achievable in most businesses, writes Frank Dillon

WITH CUTS on the agenda in every area of business, payroll may be one of the largest sources of expenditure. However, slashing jobs is a rather brutal way to cut costs and not the only way to quickly restore the viability of a cash-strapped business.

“As a rule of thumb, it should be possible to achieve non-payroll related savings of at least 20 per cent in most businesses,” suggests Stewart Dunne of accountants BDO Simpson Xavier. “The key to it is to have accurate and up-to-date management information and to communicate frankly with staff,” he says.

Under-pressure companies should try to ensure that they stay on top of debts such as Revenue liabilities as these will attract interest and penalties, compounding the problem, Dunne says.

However, in the current environment it should be possible to renegotiate terms with suppliers and to take advantage of currency exchange.

It may be cheaper now to source in Britain because of the relative strength of the euro in recent months, for example.

Long-standing suppliers who have traditionally done well from your business should also be called upon to help with more favourable prices or flexible terms. “This is a time for frank discussion with suppliers, as they won’t want to lose your custom if you have been a good client over the years. A lot of people are experiencing difficulty so it won’t be a surprise to them,” Dunne observes.

With falling demand in the commercial property sector, this may also be a good time to negotiate more favourable terms with your landlord, who will not want to have a vacant premises should your firm fail, he notes. Conversely, if you are a landlord, early engagement with tenants that you suspect may be experiencing difficulty could also prevent a more serious loss of rental income.

Even firms that are not experiencing a crisis should use the opportunity to improve their competitive position.

“A question I often ask clients is how would they design their business differently if they were starting from scratch,” says Garrett Cronin of PricewaterhouseCoopers. “In many businesses elements of duplication grow over the years, so it’s worthwhile having a fresh look at the business from time to time to identify improvements in structures and processes,” he says.

There are also a range of initiatives companies can take directly themselves to control their operating costs. For most organisations, personnel-related expenses offer major scope for cost saving.

There are a number of options here, he notes, including pay cuts, pay freezes, offering unpaid or incentivised leave, postponement of promotion and reduced working hours. Redundancy is also an option, of course, but the cost of this and its impact on the fabric and morale of the remaining parts of the organisation need to be carefully weighed against the benefits of a lowering of overheads, Dunne says.

“There may be an opportunity to reduce costs by taking some outsourced costs back in-house, or conversely you might be able to make savings by outsourcing some services and freeing up staff for revenue generating activities,” Dunne suggests.

Another area that should be targeted is stock levels. Slow moving lines should be cleared by heavy discounting, he suggests. “Look closely at unit stock turnover to see if customer buying patterns have changed in the current climate, and react accordingly,” he advises.

During the boom years, many businesses developed certain levels of expenditure, some of which could be viewed as discretionary.

“When you had unemployment levels of just 4 per cent, fringe benefits were an important factor in attracting employees. Now, employers are in a stronger position to determine some of the terms and conditions of employment,” says Cronin.

Take mobile phones as one simple example. While most organisations have always had official policies with regard to personal use of phones, more often than not these were overlooked and the phone became an untaxed fringe benefit for employees.

Now, organisations are scrutinising bills to highlight frequently dialled numbers and asking employees to pay for personal calls made. Alternatively, some are setting quotas for the proportion of the bill that the employer will foot or putting the onus on the employee to prove that calls were genuinely business-related. Other obvious areas for targeting include energy, travel, entertainment, stationery and print costs.

Cronin suggests involving staff in identifying the expenses that can be cut and incentivising them to do so with rewards for the best suggestions. “It has the added advantage of conditioning staff for change so they become part of the solution to the problems of the business,” he observes.

One specific area that is being targeted for cutbacks at the moment is business travel. The increasing adoption of telephone and video-conferencing systems has the advantage of slashing travel and accommodation costs while increasing productivity due to the time saving made.

Indeed, certain parts of the IT industry may be among the few beneficiaries of the downturn. The need to lower costs is one of the factors behind the migration of marketing spend from traditional areas to online services.

According to Fergal O’Byrne, chief executive of the Irish Internet Association, a recent survey conducted on behalf of his organisation suggested that over half of Irish marketing managers now intend to spend over 10 per cent of their budget on online marketing activity. “This would contrast with 2-3 per cent not so long ago. The case for online marketing is compelling in economic terms,” he notes.

Specifically, organisations could take advantage of the cost reductions in ditching their print newsletters for electronic versions, for example, saving on both print and postage costs. Such initiatives could also be extended to billing and ordering systems, he adds.

Experts agree that communication with staff is vital during a cost-cutting phase. Cronin says that being honest with staff shows leadership and inspires confidence during tough times. “People read the newspapers and watch TV and are aware of the current environment. Employees are prepared to be pragmatic if they believe their jobs are more secure because of it.”

Dunne says that organisations should also avoid becoming too inward focused while they are making cutbacks, and should remember why they are in business in the first place.

“Talk to your customers and get a better understanding of what they are looking for and look for ways you can save them money, for example, discounts for buying larger quantities or discounts for early settlement of accounts.

“It’s a difficult environment but customers will buy if the price is right,” he advises.