In 2020, the economic has slowed and businesses are under pressure to cut spending. However, to properly balance their budgets, businesses have to learn how to determine cost versus benefit. Some small expenses might be extraneous because they bring few benefits. Some large costs might be essential or bring substantial benefits. How to determine costs that can be cut and costs that cannot will be essential in bringing spending down and weathering the economic downturn.
Moreover, there are some costs that cannot be cut without risking the safety or legal compliance of your business. In other words, cutting some costs, like insurance, might be penny wise, but pound foolish since it might risk a substantial loss in exchange for a small gain. How to determine costs that cannot be cut without creating significant risks will also be important to reducing expenses.
Here are ten expenditures that should be viewed as investments that always produce benefits to your business:
Your staff can be one of your most important assets. Aside from the personal rapport you might have with your team, the investment that you have made in their training is difficult to replace.
However, many businesses turn too quickly to laying off employees during slow times without considering how to determine cost savings from layoffs. While it is true that layoffs can save the salary and taxes associated with employees, you may end up increasing your labor costs when business picks up again and you need to hire and train new employees.
Rather than jumping directly to layoffs, consider a few alternatives:
- Loans: The Small Business Administration (SBA) can authorize loans under the Paycheck Protection Program if your business has been affected by COVID-19 (coronavirus) or the restrictions implemented to reduce its spread. If you use the loan funds for payroll, the loan may be forgiven.
- Grants: Congress also authorized the SBA to award grants under its disaster loan program. As long as the grants are used for approved expenses, the grants do not need to be repaid.
- Improve efficiency: Investing in labor management systems can help you use your employees more efficiently, giving you more bang for your buck.
- Training: Investing in training for skilled employees will prepare them for your post-recession business plan
Business liability insurance might seem like a luxury when the economy is slow, but it can be the difference between weathering a lawsuit or going bankrupt. Business liability insurance is the policy that will cover claims against your business for:
- Bodily injury: If someone is injured in your business, business liability insurance will cover their medical expenses. For example, business liability insurance will protect you if your business is sued for slip and fall injuries.
- Property damage: If you or your employees damage someone’s property, business liability insurance will figure out how to determine costs associated with the damage and pay to repair it.
- Advertising injury: If your business infringes another’s trademark or copyright in your advertisements, business liability insurance can cover the costs of the lawsuit and any damages.
- Reputational injury: If you defame another in the course of conducting your business, business liability insurance will defend you and pay any claims.
Your business’s responsibility for providing safety equipment is both a moral and a legal obligation. If an employee is injured or worse due to a lack of safety equipment, it is impossible to estimate how to determine costs to your employee, your business, your business’s reputation.
A few of the risks of skimping on safety include:
- Fines: If your safety practices violated any laws, your business might be fined by regulatory agencies like the occupational safety and health administration (OSHA), the local health department, and the U.S. Environmental Protection Agency (EPA).
- Lawsuits: While employers are usually immune to lawsuits for employee injuries, one notable exception is that many states allow employees to sue employers for reckless safety violations. Moreover, your business is always subject to lawsuits from bystanders or customers who are injured if you fail to operate safely.
- Reputation: Your business may lose customers and employees if it becomes known as a safety hazard.
- Criminal prosecution: If employees, customers, or bystanders are seriously injured or killed due to a lack of safety equipment, you could be prosecuted for assault or homicide. For example, skimping on fire protection sprinkler system installation could land you in jail in the event of a deadly fire.
- Insurance premiums: Your insurance carrier will increase your premium rates for claims filed against your worker’s compensation and business liability insurance policies.
There are many legal issues that proactive measures might not be required. For example, you likely will not need to hire a bankruptcy attorney until your business needs to understand how to determine costs and benefits of filing for bankruptcy protection.
Tax, on the other hand, is an issue where an ounce of prevention is worth a pound of cure. A few reasons for hiring a professional tax preparer include:
- Annual changes: Tax laws change nearly every year. A tax preparer keeps up on the changes and attends continuing education courses.
- Tax planning: A tax preparer can help you plan future business activities and spending to minimize your tax liability.
- Costs of non-compliance: If you make a tax mistake, taxing authorities can take harsh measures against your business including tax liens, garnishments, and even jail time.
- Costs of compliance: Tax preparers are generally inexpensive compared to the risks associated with non-compliance.
Although health insurance is not offered by every business, the ones that do offer health insurance know how to determine cost versus benefit for ensuring their employees have access to healthcare. The business benefits of health insurance may be even greater in the midst of the coronavirus pandemic.
Specifically, health insurance provides many business benefits such as:
- Reduced absenteeism: Employees are less likely to miss work when they have access to healthcare and family dentistry.
- Increased productivity: Employees need fewer days off to take care of sick family members if their families have access to medical care.
- Business continuity: Your business is less likely to shut down due to COVID-19 if you and your employees have access to testing.
- Talent recruitment: Employees view health insurance as a significant employment benefit that can be used to attract high-quality talent.
- Tax reduction: Money spent on health plans is deductible. This will reduce your business’s tax liability.
Even without the COVID-19 pandemic, investments in technology pay off. Technology increases worker productivity by allowing workers to accomplish many times as much work as workers just a generation ago. Moreover, technology gives you new ways to reach potential customers and ensure their satisfaction with your products and services.
During the pandemic, however, communications technologies, like virtual private networks (VPNs), video conferencing software, and cloud-based applications, combined with high speed Internet carried on a fiber optic network allowed many businesses to seamlessly shift to remote work rather than shutting down altogether.
Without this option, businesses would have faced an impossible decision — shut down completely or risk the health and lives of employees and clients by staying open. But it is impossible to decide how to determine costs of lives, health, and livelihoods. Fortunately, businesses that invested in communications technology did not have to make the choice.
Even though the economy will likely continue to experience headwinds, continued investments in technology will pay off. Technologies that improve efficiency of your processes, automate your workflows, and enable workers to accomplish more work with less effort will always improve your bottom line.
The philosophy of many businesses is to cut down on marketing during economic slowdowns. The theory is that marketing dollars are wasted during a recession because fewer customers have less to spend. However, this theory is exactly wrong.
In fact, because the market has fewer customers and less liquidity, competition for those customers and those dollars becomes more fierce. Think of it this way — a town that has five auto dealerships and 1,000 people with enough money to buy a car during an economic expansion still has five auto dealerships during an economic recession but the number of people with enough money to buy a car may drop to 100.
A few suggestions for marketing to the smaller customer base during a recession:
- Focus on customers: During good economic times, even firms with sloppy marketing campaigns can attract customers. During slow times, you must focus on what your customers need and how you can satisfy those needs to convince them to spend their hard-earned money with your firm.
- Offer value: Customers always appreciate added value, such as discounts, customer loyalty rewards, and products bundled with repair and maintenance services. During a recession, these added values can make the difference between making or delaying a purchase for many customers.
- Market efficiently: Continuing to market does not require you to market the same way as before. A slowdown could be a time to experiment with different marketing channels to try to identify more efficient ways of reaching customers. For example, an auto repair shop that uses direct mail to reach customers might hire a digital marketing services agency to experiment with less expensive and more efficient marketing techniques.
Inventory requires a balancing act. You need inventory to meet customer demand without undue delay. If your inventory levels get too low, your customers may go elsewhere rather than waiting for their orders to be filled.
On the other hand, excess inventory is wasteful. It takes up space and ties up cash that can be put to better use elsewhere during an economic recession.
Investing in an inventory control system can help you optimize this balance to help you understand how to determine costs associated with idle inventory. Inventory control systems use algorithms to examine your past sales data to project future sales.
Using these sales projections along with time estimates from your supply chain, the inventory control system recommends the inventory levels for orders that will be received immediately and keeps your supply chain filled for orders you will receive in the future. In short, inventory control allows you to balance the outflows of products against the inventory on hand and inflows of products.
For example, a garage door installation business may sell 50 garage doors per month. The lead time for receiving garage doors from its supplier may be two weeks.
An inventory control system would not likely recommend keeping 50 garage doors on hand. Instead, it may recommend keeping 25 garage doors on hand and ordering 12 garage doors each week. Once the supply chain is full, the inflows may balance the outflows with the inventory acting as a buffer.
Invest in Your Workplace
Your workplace is one of the most important tools of your trade. Whether it is a factory, office, warehouse, retail shop, or restaurant, many businesses rely on their workplace just as much as they rely on their workers and equipment.
While cash flow is tight, it may seem like a poor time to make capital investments. However, there are reasons to invest at this time:
- Low sales orders means that equipment can be replaced without interrupting business activities.
- If employees are working remotely, office renovations can be undertaken without exposing them to danger or disruption. For example, major renovations to your building’s structure, plumbing, or electric service may be performed more safely and quickly without employees present.
- When the economy recovers, your business will be better positioned to take advantage of the recovery.
Research and Development
Investments in your business’s products and services are always sound. Better products and better services will always be one of the quickest ways to gain a competitive advantage over other businesses. Research and development is a critical step in that process.
Whether your business has a dedicated research and development unit or product development is left to you and your leadership team, devoting resources, such as employees and money can have important long-term benefits for your business:
- Employees might have slack time while business is slow and may be better used for research and development until business picks up.
- Customer wants and needs may have changed during the recession and may call for new products. For example, the pandemic triggered a huge market for inexpensive, yet effective face masks.
- Slow business may give you time to thoroughly examine your competitors’ offerings and figure out how to improve on them.
The second step of product development is securing protection for your new products against copying. Typically, this takes place through filing for patent and copyright protection.
Research how to determine costs of protecting your products by calling a few law firms or searching online. Generally speaking, costs include hiring an attorney and paying filing fees. However, do not be intimidated by the potential cost of obtaining patent protection. Many small businesses file for patents and copyrights. In fact, research from Business Insider suggests that small businesses obtain nearly 13 times more patents per employee than large corporations.
Economic downturns can be intimidating. This is especially true since the U.S. has experienced over 10 years of economic expansion. An entire generation of business owners and workers have never experienced an economic downturn and this downturn is especially severe.
However, by making selective investments in sound business areas, like employees, marketing, research and development, and your workplace, you can not only weather the recession, but come out stronger on the other side.