THIS IS NOT FINANCIAL OR LEGAL ADVICE. This article is for informative purposes only and we strongly encourage you to speak with an accountant or lawyer for more details before implementing any of the recommendations. Please do not rely on this information as applicable to your specific situation without consulting registered professionals. We accept no responsibility for any damages that occur as a result.
Ever since the news stopped reporting daily COVID updates, the talk of the world has shifted to a global recession. Inflation data in Canada, United States and United Kingdom all crossed 8% at some point in 2022 and the same has been seen in other national economies. We’ve all felt the sting on our expense budgets, so whoever doesn’t see a recession looming is probably living on another planet. Food and fuel became especially expensive as Canada saw gasoline prices over $2.50 per litre and grocery costs have increased over 20% for the same purchase volume in many markets. Major retailers have even admitted to slashing product package quantities to help manage their inventory and production costs.
Small businesses usually suffer the biggest setbacks as consumers tend to buy in bulk from major retailers to try and save money as they hunker down for the recession. Most businesses realize that costs are increasing and end up raising their prices to pass the cost through to their customers. One of the biggest downsides is that customers are likely to purchase less because of the higher prices, which ultimately reduces brand loyalty and sales. And if you increase prices, you’d better have a high-demand niche product (like an iRobot Roomba) or service (like tax strategist) that transcends market dynamics.
Thankfully there are a few proven strategies used by many large enterprises to change their expense structure. Not all of these are easy to accomplish, but if you want to survive during a recession, you may be forced to make some tough sacrifices in your small business.
Tip 1: Reduce wages (temporarily)
Headcount costs are often the largest portion of business expenses, with many companies committing about 50% of their budget toward staff salaries and compensation. Conversely, this means that even a minor optimization in headcount will lead to considerable savings.
In Q4 of 2022, the media was littered with news of major organizations like Meta (Facebook), Amazon and Twitter firing employees, and even closing entire divisions. Some employers also instituted hiring freezes. The same happened in 2020 during the COVID market conditions where many employees were furloughed, so the strategy is both necessary and effective in volatile markets.
As a small business, this might be hard to stomach. A significantly less dramatic alternative is to offer a wage reduction plan. Offers of wage reduction show your staff that you value them despite the economic challenges, and that some income is better than none. It’s likely that you’ll also have to implement a hiring freeze or cap on salaries and bonuses, but this could be a more acceptable conversation with employees than flat out firing. Remember to check with an employment lawyer, local business council or commerce board to ensure you’re in compliance with HR and legal practices around a wage reduction program.
However, not all employees will accept a wage reduction plan and you may be forced to let them go. Be prepared to have these conversations with your staff so that you get the best outcome possible.
Tip 2: Reduce taxes
Your accountant can be one of your best friends in reducing expenses. There are many creative ways that a good accountant can help you maximize your tax payable, which saves you money or helps you defer expenses in the short term. The first step is for you to understand that every business has two tax seasons – tax paying season and tax planning season.
Everybody knows about tax paying season, which is usually Q1 for most businesses. You gather up your receipts, create your annual income statement, balance sheet and income tax statement, and call your accountant to prepare and file your return before the deadline. But a smart business owner will use Q4 as the best time to start tax planning season. So where should you start planning?
One of the most effective ways is to prepay for expenses in the current year for costs that you’d incur next year anyway. This allows you to write off the expenses against earned income in the current year, which reduces your overall taxable income. You can complete these purchases with your business credit card so that you don’t use your own cash and earn points on your card! This is a great strategy to try and save on taxes owed. NOTE: These need to be expenses that you would have incurred in the next year anyway like subscription renewals or product inventory. So you can’t just go buy a new vehicle and try to expense it immediately!
A second common strategy is to find ways to defer your taxes till the market improves. An expert accountant will be well versed in tax deferral strategies to help you save in the short term and enable you to survive the recession.
For both strategies, it’s imperative that you discuss with your accountant EARLY. That gives you more time to plan when and how you’ll implement these strategies to get the most benefit from tax savings.
Tip 3: Reduce production process expenses
Manufacturing and production costs are sometimes the most difficult to save on, especially if you’ve been following the same processes for years! However, the production process is one where you can find many hidden optimizations that will help you achieve the same output, with reduced input costs.
There are 3 general steps in the production process – inputs, processing, outputs – that can each be optimized in different ways. However, you will be much more effective by looking at the process backward. Here’s why:
For outputs, you should start by looking at the customer demand. By creating dashboards and reviewing your product sales trends, you’ll be able to determine your customer demand. Combining this data with Consumer Price Index (CPI) data will help determine your ordering quantities and schedules. This will lead you to understand how many “units” of product or service would be sold to the market. During a recession, consumers generally purchase less – which means you’ll have to adjust your processing and inputs accordingly so that you’re not wasting expenses on excess inventory.
For processing, you’ll need to dig deep into the movement and assembly of inventory. This applies to all businesses, whether you offer products or services. The faster you process raw materials into a complete product, the faster you can get the product to market. The faster you complete services deliverables for your clients, the faster you can move to new clients. Remember that processing will also depend on customer demand so make sure to consider the intended outputs. At this stage, if your production output is reduced, you may need to consider reducing the number of employees required to deliver the lessened output. But the focus should be on making processes more efficient.
For inputs, businesses need to look at customer demand and adapt the influence to supplier relationships. With reduced demand, you’ll probably need to control your ordering from your input suppliers by instituting bulk purchase agreements, volume discounts or other creative ordering strategies to save the amount you spend on input expenses like parts or services. The benefit of ordering less and reducing production output also means you create a supply shortage for your product, making it more valuable in the long run.
There can be some low-hanging fruit in each step of the production process where business owners can implement easy rationalizations. But to truly uncover hidden savings, it’s useful to have an objective and experienced advisor who can suggest solutions you may not have seen yourself and bring a new perspective to your business model. There are also many technology solutions like Microsoft Power BI that help business owners visualize market trends and make more informed decisions.
How does Darkhorse help?
The Darkhorse team has deep knowledge of expense management, working creatively with experienced Chartered Professional Accountants (CPA) and business strategists, who carefully review your business model and suggest ideas to reduce or defer your expenses. We offer people management, process improvement, finance and tax strategies that have a positive impact on your bottom line. In a recession, it’s important that your business prioritize efficiency and consistent quality. We’ve helped a number of companies steer through two recession periods, while competitors were either acquired or forced to close. Our goal is to help companies grow sustainably regardless of market conditions, so we’ll be dedicated to helping your business survive and thrive.
Book a free consultation with us to find out more!