INTHEBLACK July 2021 - Flipbook - Page 30
F E AT U R E
// C O S T M A N A G E M E N T
"THERE'S A MUCH LARGER PICTURE THAN JUST CUTTING COSTS
AND A RANGE OF ALTERNATIVES THAT CAN BE TAKEN. FLEXIBLE
BUDGETING IS UNDERRATED, AND I THINK THERE'S A GENERAL
LACK OF DETAILED BUDGETING AMONG BUSINESSES."
JEFFREY LUCKINS FCPA, WILLIAM BUCK
significant cost to their business in 2020. However, Hay
advises business owners to seek alternatives to staff cuts.
“Compare two organisations of similar sizes – one that
cut staff and paid redundancies and one that retained
them,” he says. “The first one didn’t streamline their work
processes after cutting staff, and suddenly 80 staff were
picking up the work of 100 people. When things started
to improve, the organisation had recruitment costs and
training costs, but much of the corporate knowledge had
In Hay’s hypothetical scenario, the second organisation,
which kept its staff, fared better.
“Not only did they save recruitment and training costs in
the long run, but they were also very transparent about the
company’s performance, and so staff were willingly prepared
to take a short-term hit to their salary of, say, 15 per cent.
“When the business bounced back, it was able to
restore historical salaries. It avoided a lot of disruption
and was able to continue servicing its customers.”
Decisions to cut spending from advertising, marketing
and sponsorship commitments may also present shortterm savings at the expense of long-term business risks.
Virginia Pracht, head of strategy at advertising agency
Ogilvy in Melbourne, says cost management should be
linked to the overarching purpose of a marketing strategy.
“For instance, is your marketing effort aimed at
driving the brand long term or short term?” she says.
“Research shows that, if you stop spending on marketing
during a recession, you’ll actually take longer to recover.”
Trimming marketing spend may seem prudent in a
downturn, but Pracht says maintaining your marketing
efforts may actually give you an edge over your competitors.
“What usually happens in a recession is, most brands
cut back [marketing spend],” she says. “If you can afford
to continue with your level of communications, your
share of brand voice is going to increase, because you’ll
be heard much more than the other competitors. That
gives you a massive advantage.”
CUT, BORROW OR DELAY?
At a time when the cost of debt funding is at an all-time
low, cutting business expenses may not be the best way
to address cash shortages.
Jeffrey Luckins FCPA, director of audit and assurance
with William Buck, says negotiating with banks and
other financiers can help maintain vital cash flow.
“If you’ve got a five-year borrowing, for example, could
you increase it to 10 years and reduce the amount of
30 ITB July 2021
cash outflow?” he asks. “You’ll be in debt for longer, but
that will give you the cash that you need now to survive.
“There were a number of smart strategies that we saw
among our clients that enabled them to prop up their
operations and maintain their going concern.”
One of these strategies is delaying costs rather than
cutting them. Luckins cites an example of a professional
services firm that signed a nine-year lease at the start of
2020. The deal included lease incentives for a renovation,
with the landlord and the firm contributing A$1 million
each to cover the costs.
“In this case, signing the lease included one-year
lease-free payments in the first year, when cash was most
needed,” says Luckins. “The renovation has been delayed
until probably 2022, when there is more certainty over
financial performance and position, and the A$1 million
estimated costs could possibly be financed, further
BACK TO BASICS
Whatever the approach to cost management, Luckins
stresses it must be backed by a comprehensive analysis
of financial performance.
“There’s a much larger picture than just cutting costs and
a range of alternatives that can be taken,” says Luckins.
“Flexible budgeting is underrated, and I think there’s a
general lack of detailed budgeting among businesses.”
Sweeney adds that cost management should not be
driven by a single event.
“It shouldn’t be something that you’re reacting to,”
he says. “Having good financial control should be daily
behaviour for your organisation. What that practically