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What is Cost Cutting?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 28 August 2016
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Cost cutting is a measure used by a company or government to reduce costs with the goal of increasing efficiency, addressing funding shortfalls, and remaining functional. Cost cutting may be done in response to economic pressures and it can also be used as a business tool to become more competitive. Many people can be involved in the process of deciding where costs should be cut and by how much. This can be a controversial activity, depending on what kinds of cuts are made.

Decisions to cut costs are based on a variety of needs including concerns about the availability of money, the inability to remain competitive in a market as a result of rising costs, and the desire to run a business more leanly. Making decisions about cost cuts usually starts with an audit to see where money is being spent. Audits break down spending by department or sector and provide detailed information about expenses in individual departments to give the team working on developing a cost cutting plan an idea of how monies are currently being used.

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With this information in hand, a cost cutting team can start identifying areas of the budget where overspending is occurring, with the goal of trimming obvious fat first. This may include cutting benefits, reducing hours and production, changing the organizational structure to create fewer executive positions, and letting employees go. If costs are still too high after an initial pass of cuts, the team drills down to look at other programs that can be targeted for elimination or suspension; for example, a car manufacturer might decide to temporarily stop working on a new feature.

While making cost cutting measures, people must think in the long term. Some cuts may save money in the short term, making them appealing choices, but in the long term they could add to costs. Suspending developing of new products or redesigns of existing products and features, for example, could cost a company money by reducing future profits and forcing current customers to look elsewhere to meet their needs.

Cost cutting on the government level often attracts significant attention from members of the public. Cuts to social services as well as programs like education can be highly controversial and people may fight those cuts, arguing that they do a disservice to the population. Proposals for alternate cuts like suspending salary increases for members of the legislature may be fielded by opponents to cost cutting plans.

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tlcJPC
Post 7

Can anybody give me some good tips for cost cutting when you're starting up a business? I'm hoping to start up a small decorating consultancy in my town, but it seems that everywhere I go costs just keep racking up. Does anybody have any cost cutting tips?

Eviemae
Post 6

I have serious issues with the way that some of our American businesses are approaching cost cutting. I understand that these folks are in business to make money, but doesn’t it mean something to provide fellow citizens the opportunity to earn a decent living as well.

My father worked for the same plant for twenty-three years to provide for his family, when they decided they could have higher profit margins if they moved their textile jobs to Mexico.

They were not trying to save their business or anything like that. They could simply pay these poorer people to work for far less than an America could afford to work for; and believe me, they weren't making that much.

And while this one company is improving their financial portfolio, they completely devastated hundreds of American worker’s lives.

Sometimes it seems like all of the money is going to the wrong folks. As they say, the rich get richer and the poor get poorer.

JessiC
Post 5

@Cupcake15 – We here in North Carolina are certainly feeling every one of these pressures as well. Our county schools are looking at eliminating a total of 91 positions this coming school year. That will put the average class size up above thirty-five.

They have no choice, though, because the state government has cut their funding to just that extreme.

And that is not all that the state has done, either. My husband is a correctional officer and he is a recipient of some of those furlough days that you spoke of. He also hasn’t had a raise in going on 4 years, and was actually forced to take five percent pay cut.

Add to that a decline in the insurance and benefits offered, and we are seriously considering moving to a state that has their stuff a little better together; I just have no idea which one that could be.

cupcake15
Post 4

@Moldova - I know that a lot of governments have looked into cost management as well. There were some states that created furlough days in which state employees would be asked to go home instead of work. This was unpaid time off in efforts to balance the budget.

I know in Florida, they eliminated so many teaching positions that they are no longer hiring any new teachers. The laid off teachers are the first to get called back once a position opens up. I know that a lot of the school districts are dealing with the teacher layoffs by increasing the number of students in each classroom. There are many classrooms that now have thirty children where they previously only

had twenty.

I also know that a lot off the state parks were shortening their hours and the United States Postal Service was considering eliminating Saturday mail delivery. The airline business was also really affected by the economy and they resorted to a lot of cost reduction techniques too.

Many airlines now charge passengers to speak with an airline representative over the phone and they also charge for meals on the plane. While these policies are not very customer friendly, it has allowed them to keep fares relatively low.

Moldova
Post 3

@Suntan12 - I know that some companies go in the opposite direction in terms of cost reduction and put a freeze on hiring. They keep their existing employees, but put a freeze on any open positions that they would have normally filled.

This makes the existing employees more accountable for the remainder of the work and usually raises their productivity levels. It can be overwhelming when you have to do your job, plus the job of someone else, but companies do this to keep the existing staff in place while still cutting costs.

They also put a freeze on employee and management raises in order to get through the rough patch. Some companies even go as far as cutting

benefits such as eliminating the 401K match, and reducing the health insurance contributions. Many companies have even begun offering Health Savings Accounts which were accounts that allowed employees to fund their own health care with pretax dollars.

There was a deductable that had to be met before the insurance kicked in and in the mean time the employee paid for basic services with the money in the health savings account. I had a plan and really liked it. It also saved the company a lot of money.

suntan12
Post 2

@Cafe41 - I used to work in the staffing business and I can tell you when times got tough economically, businesses would run to us to supply them with independent contractors for the same reason. I have to say that other cost cutting ideas for companies involves outsourcing the human resources department.

There are many companies that now support the human resource function of many companies. There are staffing companies that can hire potential employees, as well as payroll companies that can process the payroll for the existing employees. Training can also be automated and self paced. Many companies are eliminating training positions and using computer based training to train its workforce.

The great thing about computer based training is that it can be done anywhere so the company will have the capability of training employees that may even reside in another country without having to fly them in for the training.

cafe41
Post 1

I just wanted to add that my husband’s company had cost cutting initiatives that resulted in moving their accounting department to Costa Rica. They saved a lot of money because most of the accounting clerks were paid a fraction of what the American accounting clerk would make. The cost of doing business is much lower as there are very few regulations if any.

There is a large presence of American companies there so many other companies must have come to the same conclusion. I also wanted to say that some businesses also hire independent contractors and lay off employees because this way they can use the contractor when they need and only pay them for the time that

they are working. They don’t have to pay benefits nor unemployment insurance when their contract is up.

This is another cost cutting tip for businesses which is why you now see a combination of contractors and employees working in the same department.

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