Think before you cut

It can be a knee-jerk reaction to make blanket cuts in tough times, but it's not always the best option, writes Fiona Reddan

AHEAD OF next week's Budget, where the Government is expected to cut its cloth to suit tougher circumstances, Paul Tuite, leader of advisory services with PricewaterhouseCoopers (PwC), says it is vital that private firms undertake similar root and brand budget reform.

"Companies need to look at every cost and ask not how much can they cut costs, but rather do they need to be incurring this cost at all? It's all about going back to zero-based budgeting and starting with a blank sheet of paper," he says.

"However, introducing a blanket cut of 10 per cent in costs is the wrong way to go about it. There might be more need for advertising or marketing in a downturn and cutting your advertising spend in half may not be the most sensible thing to do," he cautions.

Moreover, he also warns against companies cutting back on capital expenditure.

"If you have a business that needs to expand its facilities or buy new machines, you might actually be able to do so more cost effectively during a downturn, because there will be more competition for the work," he says.

Companies have been quick to cut staff numbers in recent months in an effort to reduce costs, but Tuite says that companies need to start with an audit of their company before they embark on a redundancy programme.

"The only way companies can figure out if there is room for headcount reduction is by looking at what level of demand there will be for the service or product in the coming 12 months.

"It's wrong just to say because of the downturn we have to cut headcount straight away," he stresses.

Admittedly, maintaining the status quo or doing nothing isn't a "viable option" for private sector companies. "Things are going to change and you need to realise that and do an assessment of how your company is going to change," says Tuite.

He recommends that companies remember that, despite the downturn, opportunities remain. "The downturn is also an opportunity to put structures and plans in place to ensure that the business is poised for profitable growth when an upturn occurs," he says.

Enda Faughnan, a tax partner with PwC, says that careful tax planning can assist companies in a downturn. He advises that companies should be able to improve their cashflow position by reducing or deferring tax payments. One way to do this, for example, would be by making maximum use of losses in calculating preliminary tax payments.

"It is important not to lose sight of the importance of careful tax planning while dealing with the new management challenges presented by the downturn," he says.

"While still ensuring that your organisation remains fully tax compliant, it should be possible to improve your cash flow position by reducing or deferring tax payments.

"Opportunities include making maximum use of losses in calculating Preliminary Tax Payments, availing of VAT Relief on bad debts and ensuring that all available deductions are being claimed,"says Faughnan.

Cash management is also moving to centre stage in the current environment and according to Austin Hughes, chief economist with IIB Bank, "it will become key in companies' ability to weather the storm".

Tuite agrees and proposes strategies such as proactively managing cash collection and paying suppliers in accordance with agreed credit terms and not before they are due unless attractive discounts are offered, in order to make a company's working capital management more effective. Companies should also consider realising cash by selling non-core assets, he says.

As to the macro economy and the future, Hughes from IIB would like to see the Government reduce, rather than raise taxes in the forthcoming Budget.

"It is vital that they don't raise taxes. If this is the direction policy is going in, investors are going to vote with their feet. We need to send out a strong message on taxes and it would actually make perfect sense to lower corporation tax," he asserts.

"Some commentators say you'd be better waiting for signs of a slight improvement in the economy, and then you'd have a more favourable wind at your back to do these things.

"My fear would be that if you did nothing you'd see the economy take a further step down," he says, "which would lead to a worsening in public finances."