How to cut costs

When a business' finances start to flounder, the first thought that springs to mind is, "Where can I cut?" At first glance, tightening up the budget seems like a smart and natural first move. However, be aware that if cuts are made in a hasty and arbitrary manner, you can actually do your business more harm than good. Here's how you can take a thoughtful and prudent approach to shoring up your finances without cutting vital services.

Step one: Make a list

Go through your budget and make a list of all non-essential costs. By non-essential, I mean every single line item that your business can operate without in a "worst case" scenario. This is your first run through the budget, so take it down to the bare bones. Tally up the monthly savings of each item on your list. In this step and in later steps, a handy test is to ask yourself, "What happens to my business if I don't spend money on this item?" You'd be surprised how often the answer is, "Nothing."

Step two: Check it twice

Once you have your list of non-essentials, it's time to use a bit of care in culling the next round. Look at each item and make note of the short and long-term financial ramifications of temporarily or permanently removing that item from your budget. This is where you have to be both thoughtful and careful in you assessment, looking beyond the dollars-and-cents figures. For example, let's say you own a small retail operation. You're thinking about cutting one of your two cash register positions, saving you $10 per hour per person, plus benefits. However, the wait time for your customers to make their purchases now doubles. You're saving money, but you have a new problem: Overworked employees dealing with unhappy customers who may walk out the door. What does this translate to in terms of short and long-term cost savings, employee morale and customer satisfaction?

Apply this analogy to each of your items and make a calculated decision on what the potential is for creating a new financial burden in the process of "fixing" an old one.

Step three: Pick the low-hanging fruit

Whether you're working on a household budget or a business budget, most people are usually surprised at the waste and non-essentials they find when they see each and every expenditure written down in black and white. It's easy to justify a $5 cup of coffee as being "just a few bucks," but when you have two a day every day, the numbers add up. The same principal applies to your business budget. Before you make drastic cuts that could negatively impact the performance of your business, look for ways to do the following:

Reduce consumption. Repurposing office materials and replacing paper cups with ceramic mugs saves money and "greens" your operation. Other energy-saving plans can do the same.

Look for better deals. Chances are, your vendors are in the same financial boat as you. Don't be afraid to ask for discounts, specials and price reductions. Shop the competition for bargains.

Replace rather than eliminate. Cutting out employee perks may save money, but it could hurt morale. Be creative. Instead of a monthly catered lunch, host a no-frills BBQ at a local park.

Seek employee input. If you need to cut back hours, consider offering job-sharing, work-from-home options or reduced workweeks. Many employees may happily take a small reduction in pay in exchange for more flexibility in their schedules.

Remember, not all cuts need to be permanent. Often, customers and employees can cope better with "temporary" cutbacks and reductions than across-the-board slashes in the status quo. Above all else, remember the old adage of not "cutting off your nose to spite your face." Take care to not make off-the-cuff cuts that could result in financial losses down the road.

Reviewing and tightening your budget is an exercise that's smart to undertake on a regular basis, regardless of the state of the economy. It will keep your company operating lean and mean, putting you in a powerful position of financial stability not something to be taken for granted in an uncertain economy.

Dave Archer is chief executive officer of Nevada's Center for Entrepreneurship and Technology. Contact him through www.NCET.org.