Strategic Leadership for 2010 & Beyond - Improving the Bottom LineFebruary 12, 2010
By Andrew Lattimer, CPA
The recession has hit many companies hard, forcing them to cut costs and focus on their bottom line. A recent study published in The Boston Business Journal indicated that 9 out of 10 companies have put cost-cutting strategies in place, and 50% of companies have made permanent workforce reductions as is evidenced by the double-digit unemployment rate.
With many companies realizing that the upcoming year will present a challenge in driving revenue growth, they are turning their attention to profitability. One way to focus on profitability is to cut your costs. It should be noted that people are an important factor in helping drive profitability. The challenge for many companies is to cut costs outside of their labor force. Three areas in which companies can concentrate their cost-cutting efforts are Technology, Compensation Management and Taxes.
The first cost-cutting area companies can focus on is Technology. Although the upfront cost may be intimidating, the long-term benefit is appealing. The first step is to make sure you have the right software system for your needs. Having the right software can help your company stay on top of vital information and increase profitability. Having the right technology can also help with automation and efficiencies, thereby increasing productivity.
The second area cost cutting could come into play is Compensation Management. In down times like these, companies should look closely at industry averages for compensation. If you are paying above-industry averages, you may want to consider a reduction in salaries. Although this may not be popular, it may help save jobs and increase the health of the company. However, there is another side to this. A cost often overlooked is the cost of training new employees. If your company is paying people below the industry average, you may lose employees to a better paying job. In turn, you will need to train new employees, which involves time and money.
One way to combat these costs is to utilize temporary help in replacing full-time people who have left the company. Finally, companies should look at their key employees. Key employees are very costly to replace as training costs and headhunter fees add up. As a result, it is important that you make sure key employees are paid their worth.
Utilizing available tax laws may reduce the amount of taxes the company must pay. In 2009, and most likely in 2010, the IRS has allowed taxpayers to accelerate their depreciation deduction through the use of bonus depreciation (50% deduction in first year). Section 179 expensing allows the taxpayer to expense $250,000 with a reduction in the expensing amount over $800,000 of additions. In addition, the company may be able to accelerate depreciation through the use of utilizing shorter lives as allowed for Qualified Leasehold Improvements (15 years from 39 years) or through conducting a Cost Segregation Study. Although this benefit may be temporary, it should help the company get through the recession and pay the tax when times are rosier.
Another benefit for many companies is the §199 Qualified Domestic Production Activity Deduction. Here the company may be entitled to a deduction of 6% of its net income in 2009 and 9% in 2010. As an additional perk to the above mentioned cost-cutting techniques, those cost savings will increase taxable income and therefore increase this benefit.
Additional Ways to Cut Costs
- Complete a lease vs. buy analysis on equipment and vehicles.
- Evaluate your insurance needs, which might include participation in a Captive Insurance Program and looking at strategies to increase your investment return.
- Evaluate your Benefit plans. Many plans have lower cost alternatives, and, you may be able to manage your current participants in order to eliminate the need for an audit.
In uncertain economic times, it is always beneficial to have processes in place that ensure maximum cash flow capabilities and help to keep a company vital. Looking at these areas where costs can be reviewed and cut is an excellent starting point to help make 2010 a good year.
For more information, please contact Andrew Lattimer at firstname.lastname@example.org