When business slows down or stops and the cash correspondingly also slows down, it is natural – and right – to reduce expenditure.  The manager’s job is to manage, not be overtaken by events by failing to respond.  Action should certainly be taken and some idea of the required level of expenditure reduction must be established.  A flexible Budget and Cashflow projection will help you assess what level of expenditure you need to cut.  How that is converted into action, is often woefully off the mark. 

It is a commonly held view that every area of the firm should be examined and while some areas should suffer deep cuts, every area should suffer to some extent.  This is sometimes presented as, e.g., “10% across the board”.  This blanket approach is just wrong and means that some areas will be cut too hard, while others that could be cut, are not cut enough.  

Many areas within the Profit & Loss Account and its cash flow are not within the business’s control.  It is unlikely to change its rent, rates, PII, bank loan repayments and so on.  Depreciation levels on Fixed Assets will be fixed already.  Many suppliers, such as telecoms, are likely to be much larger than you and you are not going to find it easy to successfully tell them to take a cut in income.  You are not Tesco. 

Another approach is to say that all “non-essential” expenditure should be cut.  I have no idea what “non-essential” means.  It depends entirely on the context of each business and the circumstances at the time. 

Is it “essential” or “non-essential” to maintain a strong marketing presence while business is slowing down?  It is going to be harder to obtain work, so should a firm be working harder to obtain what work there is by maintaining or even increasing its marketing activities, rather than saving money – and vanishing from the market? 

Even more worrying for managers in these times is the need to spend more money in some areas.  During the Covid-19 outbreak, IT departments increased the amount of expenditure on laptops and licences to enable their staff to work from home.  In some cases, they may have had the technology already but did not realise it.  However, they went out and bought stuff they did not need.   

At the beginning of this article, I said it was right to cut expenditure. The proper need is to cut appropriately.  So, how do you do it? 

Firstly, identify what will be important to maintain and maximise business during the slow-down.  During the Covid-19 pandemic, internet and social media marketing is important and that requires a specific expertise.  Do not cut that out: in fact, check that you have enough resource in that area.  However – and obviously – events, face-to-face meetings and other personal contacts are not needed.  So, the resources in that area can be side-lined or redeployed. 

Law firms are people businesses, so maintain your HR function.  You will need your engine room – your people – working well and you cannot manage them all personally.  One mistake could be disastrous.  It might be that once the HR function has achieved what you need, it can be reduced but you need to monitor the appropriate level and skill-set at all times. 

IT and Finance are the spinal cord of the business.  Without either, the firm will soon be unable to function.  IT may be able to run with a skeleton staff for a short period of time but if they become ill or eventually need a holiday, you will need to ensure cover is available.  There may be a reduction in the volume of transactions, which may mean you can reduce the number of people processing information: but you must ensure that all bases are covered, including financial reporting.  Unless you know what is happening, how can you react accordingly? 

Premises, however, there may well be nothing there aside from paying the rent and rates – subject to any rates relief under Covid-19 Government programmes.  File storage may be less critical, as people are working in a paperless fashion.

Secondly, identify what the “new normal” might be, so you are ready for the economic pick-up when it comes.  In his recent article my colleague, Kevin Goosman suggested what the new normal might be like under Covid-19. I don’t happen to agree as I believe, for example, that people need to work with people and so much can be gained from chance encounters with colleagues in the kitchen or corridor or spotting someone across the room, that reminds you to mention something to them.  

Whatever the “new normal” may become, the key is to change your business’s shape to match what will be needed.  Make that shape scalable, so that when the recovery comes, as it will do, you are able to expand and accommodate the demands placed on your firm.  This probably means having more people able to undertake many roles, so that you can respond flexibly.  Of course, with on-going Government support, you may have more scope/time to make these assessments, as you can furlough people.  Clearly, you cannot do that with non- staff costs. 

Thirdly, ensure your costs reduction measures have focus.  Decide which areas are important – what you must do – and ensure they are properly resourced.   Those areas that are not important can be cut out – even completely – if you judge that to be possible.  Do not go for the “10% across everything” approach.  That approach will, almost certainly, lead to the wrong outcome. 

I have deliberately not specified areas that should be cut.  Every business is different and has its own way of working internally and of interacting with its market.  You need to decide what is right for your business: but make sure you focus and concentrate your resources on what will make your business thrive.   

That means being entrepreneurial and refusing to accept that there are any holy cows. 

Written by...

Richard Wyatt FCA