Accounting & Finance COVID-19 and Small Business

The Types of Spending Cuts Small Businesses Should Avoid in a Recession

Written by Andrej Kovačević

By the beginning of June, it was official – Australia was in recession for the first time in almost thirty years. Since then, there hasn’t been much to suggest that the situation’s going to improve anytime soon.

For small business owners to survive, they must adapt. For many, this meant layoffs and other budget cuts.

The trouble is, while making cuts can bolster a company’s bottom line in the short term, it can often guarantee trouble in the long term. Small business owners must know where to cut spending if they have to but also where to avoid doing so. Since there’s plenty of information on ways to cut spending, here’s a rundown on which kinds of business spending cuts should be avoided.

Cutting Salaries to Avoid Layoffs

As much as business owners try to avoid it, sometimes letting employees go is the only way to stay afloat in tough economic conditions. Instead, some small business owners choose the share-the-pain approach instead. This usually means imposing an across-the-board pay cut.

As well-intentioned as these requests are, they often engender resentment, particularly among high-performing employees. The fairness that your business is trying to promote can just as easily be seen as a cop out to redundant workers at the expense of everyone else. That kind of outcome sends a message to the most valuable workers that they should seek other employment at their earliest opportunity. In the long run, it’s a much better idea to conduct a comprehensive productivity study and to simply let go of workers who aren’t pulling their weight, even if it’s hard to stomach.

Slashing Marketing Spending

Businesses will also slash their marketing budgets in a bid to cut costs. This can be counterproductive. What tends to happen is that revenue suffers a steeper drop-off when marketing budgets are cut, even when accounting for a recession. Even worse, your revenue may not recover right away when spending is reinstated which prolongs the bottom-line pain.

This isn’t a new phenomenon, either. There are studies going back nearly 100 years that illustrate the value of maintaining marketing spending in a recession. Available data even seems to indicate that businesses should be increasing spending instead and that doing so almost always leads to strong post-recession growth. If that’s not an option businesses should look for ways to embrace automation and other efficiencies to lower marketing costs rather than slashing their budgets.

Efforts to Cap Discretionary Spending

When it comes to cost-cutting measures, discretionary spending is an easy target. It’s unnecessary at best and wasteful at worst. Not all discretionary spending is created equal. For example, if salespeople go on business lunches with important clients that result in large sales, that’s something that might be worth preserving. If there’s money going toward travel costs to attend industry events, it could be money well-spent, depending on who else is going to be there.

There are always places to cut discretionary spending, it’s just that doing so requires a more nuanced approach. What’s needed is a cost/benefit analysis to try and put a value on your spending. You can even save on necessary expenses, such as by finding a better deal on fuel costs at Fuel Card Report. What’s important is to do more with less and not to just simply accept doing less.

The Bottom Line

Many choices that small business owners will need to make will be of the making the best of a bad situation variety. There really aren’t any positive options when a business goes into survival mode, just hard decisions. Strike a balance that will set your business up for growth once the recession is over. Failing to do that might end up prolonging the business’s life but also guarantee a protracted and steady decline. Not an outcome that anyone would be satisfied with.

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Andrej Kovačević

Andrej Kovačević is the head of production at Melbourne based, independent digital agency, Amebae Online. Andrej's favourite topics to read and write about include marketing and the ever-changing landscape of Fintech.

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