01 August 2009

Business Permanent Cost Reduction Strategies

When a business finds itself in financial difficulty, it has two options to turn around the situation, either grow revenues or reduce expenses. Revenue growth is often outside the control of management, and the decision to spend money can be made internally.

Short term measures can work during a crisis, but if a company is losing market share permanently, if there is a prolonged recession, or if the industry is in decline, effective long term solutions are required. Reducing Salary Cost, for many companies, salaries are the largest component of expense. To reduce salary cost, companies need to cut the number of hours worked or the amount paid out per hour.

Strategies include:
Overall headcount reductions: Lowering the number of full time equivalents will help reduce cost over the long run. The cost for each person includes salaries worked, but also benefits and training. Elimination of duplication: Especially in management positions, duplication creeps in when a company is growing, and combination of administrative areas can result in savings.

Reviewing additions to wages: Some industries used on-call payments, subsidies or shift pay, which can increase wages overall. Eliminating or reducing these incentives, either through a union negotiation or annual review can cut salary cost. Companies will often reduce incentives at the same time they give an annual increase, softening the blow of the reductions. Benefit reductions can also be done at this time.

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