Cost Cutting Strategy and Its Role for Business

There are times when a company will experience difficult times both from the development of the company itself and from the impact of the overall economic crisis. In these difficult times, cutting costs is one of the choices and decisions that must be implemented by the company.

It is best if cost cutting is not executed rashly because there are several things that must be considered and also have an impact on the company and its employees. Although not an easy decision, cost cutting is important to plan and discuss in order to minimize negative impacts for all parties.

What is Cost Cutting?

Cost cutting refers to the measures implemented by companies to reduce costs and increase profitability. Cost-cutting measures are usually implemented during times of financial difficulty for companies or during economic downturns.

Cost cutting can also be implemented if the company's management predicts there will be profitability problems in the future so that cutting costs can become part of the business strategy. However, this also needs to be taken into account properly so as not to have a negative impact on the business.

Understanding Cost Cutting

Shareholders who seek maximum returns on their investment in the company and expect management to sustain earnings growth. When the business cycle is up, companies are generally able to generate profit growth.

However, profits may fall and management will feel pressure from shareholders to cut costs if they continue to fall for a long time. Cost-cutting measures include:

• laying off employees
• reduce employee wages
• close the facility
• streamline the supply chain
• downsizing to a smaller office, or moving to a less expensive building or area
• reduce or eliminate professional services from third parties
• implementing new technology

Why implementing new technology includes steps to cut costs? Because nowadays, technology and machines are growing and can replace a number of employees. Relatively speaking, this cuts labor costs as machines are built after a certain period of time without labor costs.

Cost Cutting Strategy

Strategies for cutting costs are important to discuss before actually implementing them. Things like some costs are required to be important for companies to classify costs into good costs, bad costs, and best costs.

Good costs focus on growing the company and being aligned with the company's clients or customers and how to meet the needs of those customers. Bad costs are costs that are not in line with the company's growth strategy and are a waste of resources.

If bad costs are cut, they can free up resources that can be used in a more productive capacity. The best costs are those related to what makes a company unique, how it differentiates itself from the competition and how it delivers true value to its customers.

Once a company is able to allocate its costs into one of the above classifications, it will be easier to focus on cutting bad costs and maximizing the best costs. It is also important to note that cutting costs does not mean cutting costs completely. It can also refer to optimization and efficiency. It is important to measure productivity because by optimizing productivity it can also reduce costs.

The Risk of Cutting Too Much Costs

Salaries and wages are a large expense, and many companies see terminating employees as a cost-cutting measure. However, there are many real or potential costs associated with terminating an employee, such as severance pay, unemployment benefits, rehiring costs, lawsuits, decreased morale, and the risk of remaining overworked employees.

In addition, when businesses turn around more quickly than management expects, companies can experience labor shortages. This will put the company at a competitive disadvantage in an improving business environment.

If a factory is closed in a cost-cutting effort, the company may not have enough production capacity to respond to a sudden increase in orders. These all factor in to ensure the company has a sound and adaptable cost-cutting strategy.

Therefore, the decision to implement cost cutting is not an easy thing for a company. Need planning and discussion by looking at the existing situation in the company and economic conditions in general. Wise decisions are also accompanied by communication between employers and employees.

Listen to input from employees and also provide information that describes the actual situation. Cutting costs may be detrimental to some parties, but this decision can minimize the negative impact or loss for all parties.