Cost-cutting for businesses

In 2002, Scott Chatel’s business which is remodeling brownstones and apartments in Brooklyn and Manhattan was so good that he planned to increase annual sales from $2 million to $5 million by 2005.

He renovated new office space, signed a three-year rent, doubled his staff and printed colorful brochures. His company, Chatel Contracting was busier and the expansion costs deleted Chatel’s profits, leading him to take on debt.

"It was the overhead that was doing us in. The jobs were always profitable," Chatel says. By the end of his lease in 2005, Chatel dropped his expansion plans and went into cost-cutting mode.

A lot of small businesses may soon find themselves in Chatel’s situation due to rising costs and slow sales in a bad economy. Recent surveys of economic trends by the National Federation of Independent Business found weak levels of capital spending over the past six months. And in its latest survey, conducted in September, just 21% of respondents expected to make capital purchases in the next few months. The survey also found businesses reducing inventories, with a net 12% cutting stock rather than adding.

As business owners are nervous about the economy, many have stopped from more cuts or layoffs, says Jennifer Rockne, director of the American Independent Business Alliance, based in Bozeman, Mont. "The local folks are typically very reluctant to lay anybody off because a lot of their employees tend to be longtime employees," she says.

By detecting and accepting the problem earlier and making slight reductions, small companies can avoid drastic cuts later on, financial experts say. Companies that ignore warning signs can erode their profits with rising costs and those that borrow to meet these costs can end up broke.

Early signs of bankruptcy

Chatel did serious moves to cut his overhead. He gave up his office space destroying the $50,000 worth of renovation he did when he moved in. He moved back to the office in his home. Instead of cutting his workforce, Chatel left vacant positions unfilled until his staff decreased from 15 to five. He went from doing 60 clients a year to just 13 and he carefully chose the most profitable ones and no subcontractors.

"Sooner or later you have to know when to say enough's enough," he says. Chatel counts himself lucky for acting when he did, but many small business owners don't see their financial troubles coming. "A lot are financially ill but don't even know it until it's too late," says Sam Bornstein, a CPA and professor of accounting at Kean University in Union, N.J.