When the economy begins to contract like we’re seeing today, most entrepreneurs look for opportunities to cut costs. Often, these cuts are both broad and deep, which forces them to scale back on operations, which means less revenue.
Under already unstable economic conditions, this can be a recipe for disaster.
Scaling back means, at best, stagnation, and at worse, decline. It means missed opportunities. And it means giving up your position in the industry.
While there is merit to cutting some costs, they need to be strategic. You need to cut in the areas where there is no immediate return on investment., and do everything in your power to maintain or even increase investments in the areas that do. You also need to allocate capital to carry you through leaner times, but also to seize on opportunities that may arise amidst the chaos. As your competitors begin to struggle, they may lose key clients, be forced to liquidate assets, or even go bankrupt, and this creates opportunities for you.
That may sound harsh, or even a bit mercenary, but it’s the reality.
So let’s first talk about where to invest in an economic downturn.
Any proven marketing channels are an obvious choice. If you have a tactic that’s working particularly well, invest more to scale it up. This is a simple mathematical equation—a certain amount of capital invested equals a certain amount of profit returned. So by increasing input, you’re automatically increasing output, which in this case, is revenue. It’s important to remember that as you scale any marketing channel, you will eventually start converting at a declining rate because you’re reaching a larger, less targeted audience.
Another area you should look to invest in is production. If you have the opportunity to acquire technology, equipment, or facilities that enables you to improve efficiency, reduce costs, and increase production, you should jump at it if it’s even remotely feasible. This allows you to land and serve more clients, and to gain valuable market share. But be careful not to bite off more than you can chew here. It’s easy to become overconfident when you’re thriving while your competitors are struggling, so keep that in mind as you make decisions in this area.
You should also invest in products and services for underserved sectors in your market. As the economy shifts, you may find that the buying habits of clients in your industry start to shift dramatically. This creates an opportunity to launch something to suit their new needs. Maybe it’s a lower cost offering, or on the contrary, it might be a more comprehensive, concierge offering. While your competitors stick to what they’ve always done, you can invest in something clients will flock to today, and start gobbling up market share. The key is to test demand on a small scale, and then when you have enough evidence of sufficient demand, you invest in the full development of that product or service. Again, this is not the time to get overconfident.
As for cuts, the lowest hanging fruit is unnecessary travel and entertainment. Anything not directly related to revenue generation or providing your product or service should be eliminated.
Unnecessary subscriptions is another large category. Most of us have dozens of software subscriptions we haven’t touched in months, but it’s not limited to software. There are also subscriptions to media outlets, private communities, and even digital books.
Since most of us don’t do a good job at keeping track of these, a good way to eliminate everything you don’t truly need is to simply cancel the card you use for these services. Then, you look for what breaks and renew those subscriptions, while anything that has no noticeable impact on operations, you don’t renew.
And generally speaking, I would cut any planned hiring unless it’s absolutely necessary to continue operations. This isn’t as much of a cut as it is the elimination of previously budgeted spending.
Beyond that, you’ll want to look for any other opportunities to cut spending in areas that don’t directly relate to revenue generation or providing your product or service.
The bottom line is that economic uncertainty isn’t a time to panic. Things will change, but if you’re proactive and evolve accordingly, you can thrive. Periods like this always result in dramatic shifts where some companies stagnate or even collapse, while others take over their industries. While things will be tough, the economic downturn will create tremendous opportunities.
At the end of the day, you get to decide which way your company goes, and that’s based on the budgetary decisions you make now—will yours be based on fear or optimism?