Get Started

Q: I just came back from the States, to help run the family business (a furniture-making company based in Pampanga). I noticed that some of our old-time supervisors have salaries that are above industry standards, and honestly, I feel that they are overpaid. Our business is doing well, but I want to cut costs where I can. Would it be a good idea to cut their salaries or even retire them?

If you want to reduce your costs, you must plan and manage it well by right timing and properly identifying the expense you want to cut. This way, you can anticipate any risk or negative consequences that could affect your overall profitability.

When you draw up your-cost cutting measures, you manage the risks by understanding the nature of your expenses. There are expenses that you can simply shoot down because of their obvious futility to your business growth. However, there are expenses that may look irregular and yet are vital to your business success. These are what you should carefully examine and analyze because these may have long-term effects on your business.

Let us assume that you retired all your old-time supervisors because you find them overpaid and replaced them with younger supervisors with lower salaries. While this move may give you substantial savings from payroll, this may not necessarily lead to greater profits. The new supervisors that you put into the company may not have enough experience on how to run your operations or handle your employees and clients. This could eventually lead to inefficiency losses.

What if the new recruits were competent and capable? Yes, this is possible, but there is no guarantee that they would stay with you for long. Since they are younger and command cheaper salaries, they will always be on the lookout for greener pastures. If this happens, you will have frequent turnover of managers, and this could affect your long-term business sustainability. Of course, it is also possible that your decision to replace your overpaid, old supervisors may be right, but the risks of failure might be greater.

Another thing that you could do is look at percentages instead of absolute amounts. Assume that you pay your supervisor at market rate salary of P25,000 a month, but his contribution to your monthly sales is only P100,000. Although his salary is at par with the market, you may find the salary expensive because the salary ratio is high at 25 percent (P25,000/P100,000). Now, let’s assume that your supervisor gets paid P50,000 a month and his contribution to monthly sales is P500,000. While you may find his salary expensive given that it is above industry average, you may find it worth the pay because his salary ratio is only 10 percent.

In practice, when you implement cost-cutting measures, always evaluate each item for their relative value to the company, rather than their fixed costs.

When you evaluate the salary of your supervisors and their respective contributions to your business, you can identify whom to replace and to retain. This way, you would replace only those who are truly overpaid, without seriously affecting your business. When you do that, you will not only decrease your costs and increase profits but also improve your management capability.

Always remember that before you start reducing expenses, you need to review your information well and how it benefits your business. It is important that you have a good accounting system to enable you to capture the correct figures you need before you make a decision.