How Small Businesses Can Cut Costs But Avoid Layoffs

To survive in the time of COVID-19, struggling small businesses all over are looking to slash expenses. But, while the biggest cost for most is their payroll, they're reluctant to lay off employees who need that money to meet their own bills. Plus, let too many workers go, and businesses can find themselves scrambling when demand starts coming back.

There are, however, a handful of tactics companies can try to cut labor-related expenses without laying anyone off. In fact, the Paycheck Protection Program (PPP) offers forgivable loans to small businesses that maintain their payroll--essentially, a grant to retain their workforce (though it announced it was out of cash as of April 16, Congress is working on approving additional funding). And, while the need is particularly acute now, many of these strategies can serve a company well in less extraordinary times, as well.

Start With Perks

Not long ago, when the labor market was tight, small businesses had a hard time finding and keeping employees. As recently as January, a survey of company owners conducted by the Small Business Trends Alliance, found that one of the two top challenges cited by small enterprises was recruiting and retention. To attract employees, many introduced all manner of perks, from a big 401(k) match to low health insurance co-pays and car allowances, according to Chris Sica, chief revenue officer for the Ronin Society, a small-business consultancy in Austin.

Now, such benefits are obvious places to start belt-tightening. "Look for any major line item in the budget," says Sica. Before making any changes, however,Companies should first review their plan documents and check with an HR specialist, health insurer, or plan administrator--to make sure doing so wouldn't violate any contractual agreements or federal laws.

Cut Salaries

Another tack is to reduce salaries temporarily by anywhere from 10% to 25% or more, depending on the employee's pay level. Rule of thumb is, the lower the compensation, the lighter the decrease. "If a team member is making $40,000 a year, a 20% reduction could be devastating," says Lil Roberts, CEO of Xendoo, a fintech company oriented towards small businesses. Furthermore, those in leadership positions should be included--and receive a bigger haircut. "It sends the message that we're all in this together," says Sica.

To get more bang for the buck, businesses can let employees supplement their pay with unspent vacation time. It needs to be done in compliance with the company's established policies, however. Damien Weinstein, a partner with Weinstein + Klein, a New York City-based law firm specializing in employment law, advises checking the employee handbook, if there is one, for the rules governing paid time off. Plus, it's best to put the details of the revised procedure all in writing and have employees sign off on the document.

For many employees, health insurance is as important an economic aspect of their staff job as their paycheck. For that reason, another approach is to cut the work week down to four days, or put full-time workers on a part-time basis. That way, employees work fewer hours, but retain their medical coverage. Sica recommends that business owners first check with their insurance providers, since many plans require that employees work a specified minimum number of hours to be eligible for coverage. "Get them to that threshold so they can keep their benefits," says Sica.

To make employees whole, companies can designate pay cuts as more of a loan than a pure reduction in compensation. Companies would structure it so at a certain point in time, they would pay employees back for the amount docked from their salary. That means setting repayment terms and a date when reimbursement will begin--say, once the business hits a certain revenue threshold or cash flow number. "For the company, this is basically free debt," says Sica: The firm is essentially borrowing money from its workers, which it will repay in full, only without interest.

Redeploy Employees

With their usual source of revenues suddenly up in smoke, some businesses are taking a hybrid approach to cost reduction: finding ways to pivot while also cutting salaries. In the process of developing different revenue streams, they're assigning new duties to employees in lieu of laying them off.

Take Bobby's Bike Hike, which, under normal circumstances, conducts food-themed walking and biking tours of Chicago. In addition to cutting the salaries of the company's five-person leadership team by 20% each, owner Jeremy Lewno also is introducing a new, virtual tour highlighting the history of Chicago's deep dish pizza; viewers will be encouraged to dine on their favorite Chicago-style pies while watching. He's doing so partly to provide continued employment to his seven guides, who will either serve as hosts or do behind-the-scenes work. Part of the tour's $9.99 cost will go to guides, "so we can keep them and make sure they have money in their pockets," Lewno says.

In other cases, companies are assigning employees to tasks they didn't have time to do before. Georgette Blau, who runs On Location Tours in New York City, for example, has asked her bookkeeper to catch up on unpaid bills; other employees are reaching out to travel platforms to list the company's services.

Pick Employees' Brains

Often, it's a company's front-line staff or middle managers who have the best feel for likely places to cut costs. "Tell your employees how much you need to cut expenses by and where they think you can find those dollars," says Brad Plothow, vice president of brand and communications for Womply, which sells marketing software for small businesses. "You'd be surprised how many business owners learn about costs they weren't even aware of." P

He points to executives of a professional services firm who, after polling their employees for suggestions, recently discovered they were using duplicate email marketing systems. Specifically, they were paying for a marketing automation platform, although their customer relationship management (CRM) software included an email marketing component. The upshot: They decided to get rid of the former.

Plus, soliciting advice from the rank-and-file and getting them involved in the expense-reduction process can be an empowering experience for them. If the measures are their idea, it tends to take some of the sting out of the cost-cutting, uniting everyone in the common cause of keeping the company going.