Strategic cost-cutting: How to be proactive, not reactive

Written by: Karl Sakas

Worried your agency’s revenue might look a little shaky? I strongly recommend you pause now to define your agency’s three unique “cost-cutting tiers.”

Why? You’ll be really glad you did if you need to cut expenses later. But it’s important to cut costs in the right order—not too fast, not too slow.

I did the “tiers” exercise with many of my clients last fall, as I advised them on their annual budget.

In this article, I’ll explain my concept of cost-cutting tiers, recommend the ideal order for cost-cutting, and share examples of agency expenses to plan to cut in each tier.

This extends my advice last week, where I shared steps you can take today to prepare your agency for the next recession. Share these with your finance person, since you’ll want their help.

Why Pre-Define Cost-Cutting Tiers?

I acknowledge this isn’t a fun process—but if things get worse, doing the “cost-cutting tiers” exercise now may save you from going out of business later.

When agency owners haven’t pre-defined the expense tiers to cut, they tend to panic when money gets tight. That’s understandable, but then they’re not strategic about which expenses to cut.

My goal here is to extend your financial “runway” in a phased way—so you don’t suddenly realize you need to shut down on a week’s notice because you’re in the Agency Doldrums and you’re out of cash.

I’ve taken most of my clients through the cost-cutting tiers exercise—some because they needed to make immediate cuts, but more often as a “just in case.”

What’s in Your 3 Cost-Cutting Tiers?

Your three specific tiers will be unique—the contents vary between each agency. I’ll share examples in a moment—but first, here’s my philosophy behind each (increasingly-dire) expense tier:

  • Tier 1 cuts: These are expenses that were largely invisible to your employees and your clients. If you enact them, Tier 1 cuts are mostly annoying to you and your leadership team.
  • Tier 2 cuts: All of your employees will start to see and feel these cuts. Your more astute clients will notice, too. If you enact Tier 2 cuts, now it’s emotional.
  • Tier 3 cuts: These are the deepest and hardest cuts. As you lay-off great New Rope employees that you can no longer afford, now it’s wrenching. But if it gets to this point, the alternative is shutting down the agency.

On that not-so-upbeat note, let’s look at examples of expenses to consider as you pre-populate each of your cost-cutting tiers.

Creating Tier 1: Cutting “invisible” expenses

These are expenses that are largely invisible to your employees and your clients.

This might include reducing your own travel budget (e.g., Hampton Inn instead of Hilton), not automatically renewing your lowest-converting event sponsorship, and perhaps deferring some of your own expense reimbursement. (But do keep submitting your expenses; the company still owes you, even if you don’t get cash right now.)

Look for unused (or under-used) SaaS subscriptions and pause or downgrade your plans.

When possible, delay buying new computers. And definitely don’t buy new furniture.

Pause any plans to move to a larger office; if things get worse, expanding your space is likely the wrong direction.

Check your lease to see about subletting and early-exit options. And estimate the severance you’d need to pay for each employee. (You’re not going to use that info ’til Tier 2, but you don’t want to find later that paying severance would clean out your bank account.)

Creating Tier 2: Cutting bigger expenses

These expenses save significantly more money than Tier 1, but they are now visible outside the leadership team. Cuts have now shifted from “annoying” to “emotional.”

It’s time to stop procrastinating on laying-off your Wet Twine employees. Initiate a hiring freeze, too, unless you’re confident a new role will be highly profitable almost immediately.

Cut your own salary, at least somewhat. If you have freelancers supporting unprofitable clients, it’s time to terminate the clients—and the freelancers, unless you need them elsewhere.

It’s time to tell your vendors you need to reduce your scope (or potentially increase your scope if it means replacing a so-so overpaid employee). It’s also time to start recruiting tenants to sublet your space (assuming your lease permits that).

Call an all-hands meeting to let people know the company’s facing problems.

Some people will start looking for a new job, but you’ll likely find your best employees rally to help you save the company. (And they can’t rally if they don’t know there’s a problem.)

Now’s the time to find a therapist, if you don’t currently have one—you need support. (If you have a coach, they may be able to help to a point—but we’re not mental health professionals.)

Creating Tier 3: Cutting people… so you don’t go out of business

If you need to enact these, you’re on the verge of going out of business. The cuts are the deepest and hardest. If you get to Tier 3, you’ve shifted from “emotional” to “wrenching.”

Given that even a well-run agency is spending half its revenue on staff, layoffs are unavoidable in Tier 3.

If you’re at this point, your office now seems like a beautiful, but over-priced space… and you probably realize you can’t get out of the lease.

If you have employees supporting unprofitable clients, it’s time to terminate the clients—and potentially the related employees, too. Be sure to cut enough people at once.

This is typically the tier where I recommend my clients terminate my consulting and coaching services—they need my help, but their own personal survival is now more important.

Creating Your Agency’s Cost-Cutting Tiers

Depending on your current financial situation, the cost-cutting tier exercise may be distant… or Tier 1 may be now.

Either way, read (or re-read) my article on recession preparation, and then start making a list of things to cut in each tier.

For ideas—and numbers—you’ll want to run reports in your accounting software. Some to consider (for the past fiscal year and/or the past 12 months):

  • Profit & Loss
  • Expenses by Vendor
  • Payroll Summary
  • Revenues by Client
  • Profit by Client
  • Hours Billed by Employee
  • Accounts Receivable Pending

As I mentioned, you’ll want to get your finance or accounting person’s help as you define cost-cutting tiers. Why? Because this will be a lot to dig through. And each tier will get increasingly wrenching, because you’re exploring which employees you’d terminate if you got there.

Beyond the accounting support, be sure to get emotional support. Your business partner, therapist, coach, or other advisors can help. And your self-care is more important now than ever.

Question: When will you draft the first version of your agency’s three cost-cutting tiers?

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