Panic Cost-Cutting During a Recession Can Hurt Your Business in the Long Term

An article in the March issue of Inc. magazine by veteran entrepreneur Norm Brodsky points out that fear that overtakes business owners during a recession can lead to unwise panic decisions that weaken their company in the long term.

“Fear can be a motivator, but it can also lead you into bad decisions, particularly in times like these,” Brodsky writes. “I have no doubt that a lot of business owners have spent the past couple of months implementing cost-saving plans and survival strategies that will weaken their companies and damage their long-term prospects. They've done it because they've been afraid, and fear makes us shortsighted.

“With the economy falling apart around us, we forget that recessions always end. Yes, some businesses will go under, but some companies will emerge stronger. If you want yours to be among the latter, you need to be careful about which costs you cut and which deals you offer your customers.

He makes his point by using a case study of a young woman named Lisa whose photography business had grown to four galleries in California and New Mexico. Her business had fallen sharply due to the recession, and she needed to either increase revenue by $200,000, or cut her spending for the year by that amount in order to remain stable.

Analyzing her situation, Brodsky talked her out of reducing hours at the galleries, saying that would reduce the amount of time when customers could come and purchase her work.

Rather, Brodsky recommended looking at ways that would reduce costs more appropriately and/or enhance revenues. One area of cost reduction was to try to negotiate with her landlords at the various locations to temporarily reduce her rent payments, with the shortfall being made up later on.

Brodsky advised against having a sale – i.e., reducing prices overall – since he believes in general that one should hold the line on prices during a recession, while at the same timing providing some value added to bring in new business. For example, he suggested holding a “customer appreciation week,” where Lisa could offer something extra to the people who buy her smaller, unsigned photos – for instance, a special limited edition of select photos signed by her.

Lisa also suggested she could save significantly by reducing inventory, where she said she has typically overspent.

An idea to potentially increase revenue significantly was to look for untapped markets outside her locations in the West. Brodsky suggested that the photographer expand into other areas of the country, give up some control to allow for larger commissions, and thereby potentially sharply increase business.

As this example shows, not all ideas for cost reduction are good ones – in the sense that they can actually impair the future of the business.

“At the end of the recession,” says Brodsky, “the winners will be those who have taken advantage of their most important resources -- imagination and creativity.”