In the present economy with sharply decreased consumer demand, companies are striving to find ways to cut down the cost of products and services in order to still show some profit. Some companies are redesigning their products from cheaper materials, while others are moving their production to countries like India and China. Often, programming and tech support are also outsourced to India, where English the second native language.
In the present economy, show how budget cuts are affecting any company's products or services. (E.g. re-design products from cheap materials or partially missing parts.) Think of chairs with three legs, cars made of plastic, budget McDonald's menu; design advertisements promoting really cheap products and services, think of how budget cuts will affect famous politicians , celebrities, or famous architecture, etc.
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This contest is fueled by the following news: Many people have suffered from the recent economic crisis. There are some valuable lessons to be learned from it.
Particularly during crisis time, it is necessary to take up the issue to increase the business efficiency. In a good economic situation, a company may exist comfortably even during dull marketing and ineffective business processes by intuitive finance control. But when difficult times come and competition increases, these and other problems of controlling the system become critical for the activities of a company. And in reverse, a company with an effective controlling system survives a crisis with minimum budget cuts and losses.
The experience of the previous big crisis in 1998 showed that forced budget cuts of business volumes may result in its sanitation, if it is implemented correctly. Non-compulsory expenses will be reduced, less effective business sectors will be closed, which results in the freeing of funds, which can be used for the main impact sector.
In conditions of crisis, the loyalty of personnel increases, the necessity of reforms becomes clearer, which favors conducting of changes quickly, without unplanned staff losses and conflicts. After the crisis and after some time market growth will start, and the people who survived the budget cuts with minimum losses and the maximum advantages will reap its benefits.
One good suggestion is: it is necessary to reduce and also increase as per plan. Many industrialists conduct cutbacks and budget cuts based on intuition and sober ideas. However the risk of such intuitive decisions especially in the conditions of crisis is very high, as mistakes may influence the survivability of the company. That’s why it is necessary to simulate variants of the business reductions, predict the economic consequences and risks, and then plan carefully the selected variants of the budget cuts.
This work is carried out in the following sequence. First of all, it is necessary to plot the economical model of the enterprise. For this purpose, it is better to use one of the business model programs which exist in the market. The company economics can be represented in an Excel spreadsheet, but the labor content of such work will be high, and the flexibility of the model – low. The economical model should permit calculations to forecast the budget of income and expenses, budget of funds flow and the balance and financial coefficients at different variants of cutbacks. Therefore, the model should have details of units of cutbacks, and the consequences of the budget cuts should be reflected at respective items of budget. For example, if staff cutbacks are proposed, the model should consider the change of those items in the budgets, which are changing during the cut down of each work place:
* Unconditionally, salaries, taxes;
* Possibly, rents, communications etc.
Forecasting of the income part requires special care. From one side, forecasting in the conditions of crisis is thankless work. But on the other side, sharp cutbacks may strongly effect not only the reduction of expenditure (first of all, in the form of salary), but also income. This may not be obvious immediately, but further changing of the situation will not be so simple.
If the modeling methodology of the expenditure part depends less on the type of product and the client market, then the forecasting of income will be done differently in each case. For example, for companies working in the industrial market, the most authentic forecasting will be based on the behavior of the biggest clients.
The important modeling stage of the economics of the enterprise — this is the accounting of risks. A series of parameters of economic models have a probability nature. For example, this is related to volumes of realization and the selling price of the products. Each version of cutback is to be verified for sensitivity to the variation of these parameters. The following is possible: the variant, which is the most attractive under the condition of the execution of a realization plan, can be catastrophic in the case of the non-execution of a small part of the plan. In reverse, a conservative scenario, which does not promise great financial results, possesses good stability to the risk of the pessimistic growth of events. Modern business modeling programs allow the calculation of the stability of the economic model to such risks that involve budget cuts.
In the result of the execution of jobs related to the enterprise economical modeling owners of the company get an instrument, which allows the calculation of forecasting financial results and the risks of each of the scenarios of the budget cuts on business volumes. As usual, the chief personnel should take the decisions. It is important, that it should be taken based on the objective data, and not intuition, which in a stress situation may fail.