Management Accounting

Lesson from the Downturn: Cut Inventory, Not People

Cutting costs via working capital improvements can be as effective as layoffs, says a new survey.
David KatzMay 28, 2010

Relying heavily on layoffs and wage reductions to cut costs over the past year, midsize and small businesses missed a huge opportunity to generate cash out of improvements in inventory and working capital, a newly released survey suggests.

The potential to cut costs by slashing inventory seems especially large among midsize companies ($10 million to $500 million in revenue), according to a Greenwich Associates survey of 519 financial decision-makers from small and midsize outfits. Although only 17% of the midsize companies cut inventories last year, the ones that did so saved an average of almost $520,000. While layoffs were much more popular — 47% of  midsize companies cut staff or management — the reductions saved an average of just $400,000 (see chart below).

Indeed, layoffs were far and away the most common cost-cutting tool among the companies represented in the survey, which was conducted from March 1 to March 26, 2010. About 40% of small businesses ($1 million to $10 million) slashed staff or trimmed management during the previous 12 months, saving about $175,000 for the effort. But 16% averaged savings of more than $100,000 by pulling back inventory.

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Another painful cost reducer — salary freezes or changes to pay packages — was also popular. Thirty-seven percent of midsize companies and about 33% of small businesses decided to freeze compensation, averaging $245,000 and $56,000, respectively, in the process.

The few that moved forcefully to reduce their working capital, however, seemed to fare at least as well — and probably with a good deal less pushback. While only about 9% of all the companies represented cut costs through “aggressive working capital management,” midsize companies that did so saved a tad more than $350,000 and small businesses saved more than $33,000.

Greenwich cost chart