When crisis looms

This is part two in a three-part series on cost cutting and business restructuring in various situations. This article explores cost cutting and restructuring in less urgent situations. Read part one, on cost cutting in an emergency. 

Maybe you recently lost a major contract, higher lending costs are coming or you are starting to see signs of a recession. There are many reasons why you may need to start planning to restructure or cut costs in your business. Taking decisive, well-informed action is key if you find yourself in this situation. 

It is important to have a clear vision for your business before undertaking restructuring and cost cutting, so your people can get behind a consistent goal. The process will not be successful without overcoming people's reluctance to embrace change. Your objectives should be extremely explicit and consider the tradeoff between costs and income, potential impacts on customer service, and risk, profitability and growth. 

Keep the following in mind as you begin working on your cost-cutting approach: 

• Do you have the right data to make informed decisions? Is it reliable? 
• Can your team deliver what is being asked of the business? 
• What needs to be done to get your people onboard with the changes to come? 
• How will these changes impact other stakeholders? Customers/clients? 
• Have you run scenario analysis in case things do not go according to plan? 
• Over what timeframe should you undertake cost cutting? In what order? 
• What is needed to sustain these new measures? 

Cost-cutting and restructuring approaches come with myriad factors and considerations, including what is and is not advisable to cut. Cutting costs is an obvious way to maintain profitability levels, but you should determine strategically what can go and what should stay. Anything that makes your business unique, keeps your data and your customers' data safe, and provides value to customers should stay. If you make cuts that diminish the customer experience this could negatively impact your business in the long run  -- potentially leading to a decline in revenue and eliminating any benefits of cost cutting. 

Things that could go include those that hold back profitability from other parts of the business or costs benchmarked beyond industry norms. 

In business, leaders often come under pressure to reduce costs during challenging economic times to try and maintain margins. However, this can do more harm than good to shareholder value if not done well. A careful approach is needed, with a focus on building sustainable resilience. Here are some things to keep top of mind as you begin your cost cutting and restructuring journey: 

• Define the ideal future state of your business before you start making cuts or restructuring. This includes balancing short- and longer-term priorities and fully understanding your choices and trade-offs. If you have key stakeholders, ensure they are onboard before you begin the process. 
• Determine whether debt restructuring (reducing profit leakage from debt) or operational restructuring (improving efficiency and profitability) will be more effective for your business in the long run. 
• Understand the entire value equation before cutting costs. If you decide to cut back on shipping costs, for example, it could take longer for customers to receive their purchases and may make them think twice about buying from your company again. 
• Lacking cost transparency and data (determining your true cost of operations and your true profitability levels) can be a challenge when looking at your business, which is why it is necessary to dig deep for quality data  -- so you can make cost-cutting decisions based on more than opinion. It is worthwhile to invest in knowing the facts before making any decisions. 
• Embrace strategic digital transformation and use technology to reduce costs and time spent on legacy manual processes, improve experiences for customers and employees, and give your company a leg up over competitors in tough times. But before you make the leap, assess the real return on investing in digital transformation. 
• Think about cash generation. Expenses are paid with cash, not accounting profit. As debt gets more expensive and sales come under pressure, it is important to make decisions about cost cutting and profit in the context of cashflow. 
• Build your people's capabilities and keep them informed. This will help you make sustainable, long-term changes as well as help your business' culture shift go much more smoothly. Getting everyone on board with what you're doing can help ensure you are still trusted and respected in the end. 
• Seriously consider whether cost cutting or restructuring is the right move to make. Sometimes there are options that can create more shareholder value  -- for example, selling a business unit to a strategic buyer might be preferable to trying to cut costs. 

If you are unsure where to begin, speaking to an advisor to get an external opinion can help reduce the uncertainties of cost cutting and restructuring. Advisors can work with you on achieving measurable improvements to revenue, operating margins, cost structures and working capital positions, and reducing complexity to enable faster decision-making and help improve your business' responsiveness to changing market conditions. 

Additionally, a tool like the KPMG Financial Performance Index, which catalogues corporate financial performance, can help you spot industry trends or worrying signs and empower you to prepare for the unexpected before it occurs.