How deep do I need to go in cutting costs?

Planning for the future right now is extraordinarily difficult. 

We know that unemployment is at record high levels. High unemployment is a signal the economy is going to tank. When consumer spending drops significantly (like when lots of folks lose their jobs), the consumer companies get hit first, but pretty soon the whole economy suffers. Worse yet, the entire world economy is in shutdown, so it’s not like exports can pull us out of it.

While some sectors, events, hospitality, and travel, have been crushed by the shutdown, others will thrive. It’s not all doom and gloom; maybe this will be a short pause in a roaring economy. 

With these opposite viewpoints in front of us, how do we decide how to respond?

Let’s look at the options

When I look at the options in front of us, there are two scenarios to consider. We could have a short downturn with a relatively quick recovery (6 months or less of recession), or we could have a more protracted downturn (9 – 12 months of recession). 

In the face of those scenarios where we, as business leaders, need to decide how to respond. Do we make cuts? How deep do we go?

In the first scenario, a short slowdown, minor cuts coupled with some government support might be enough to get us through. With our team mostly intact, we’ll be well poised for the recovery. 

If we make more drastic cuts, we’ll have more cash in the bank, but it might take us longer to assemble a team to take advantage of the quick recovery. 

In the second scenario, a prolonged slowdown, minor cuts coupled with declining sales might drain our cash reserves. Further cuts driven by declining sales leave us with less and less margin. A precarious position to be in! If the country experiences a second spike in cases, this position could become untenable and force you to close your doors. 

If we make more significant cuts, so much that we can remain cash positive even if sales drop even further, then we maintain our cash reserves. Whenever the economy decides to turn back up, we’ll have the resources to hire and take advantage of whatever bright spots we can find in our client base. 

Have a bias toward survival

If we choose to make deep cuts now, the risk is that we might be slower to recover from a short slowdown. 

If we choose not to make deep cuts now, the risk is that we run out of cash.

 When faced with an uncertain future, I want to choose the course that offers the best chance of survival. 

Are you facing this decision and want someone to talk it through with? Hit reply and let me know. I read every response and answer almost all of them. Let’s get on the phone and talk through your situation. 

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