Cutting Costs during Bankruptcy Proceedings

Bankruptcy proceedings can be incredibly disruptive for a company. When a company files for bankruptcy, it is facing a cost crunch. As a result, this is the time when the company wants the costs to be the lowest. However, filing for bankruptcy has a lot of incidental expenses. This is the reason why filing for bankruptcy can actually be an expensive event.

If the company plans to survive in the long run, it needs to start cutting costs immediately. It cannot wait for the bankruptcy proceedings to get over before reorganizing the costs. By then, it would be too late, and the business would have already sunk too far into debt.

However, companies have to be careful while cutting debt immediately. In this article, we will explain some of the principles which are commonly used in order to explain cost-cutting techniques that need to be followed in such companies.

Principles to be followed

Specific cost-cutting ideas can be different depending upon the company and the industry in which it operates. However, the basic principles which need to be followed remain the same. Two of the most basic principles are as follows:

  1. Companies facing bankruptcy should avoid looking for big bang ideas, which would drastically reduce the expenses at one go. Firstly, such ideas do not often exist. Secondly, even if they did exist, such ideas would not be without risk. The more radical the idea, the bigger the risk. Bankrupt companies do not have the wherewithal to take such high levels of risk. Hence, they are better off looking at incremental innovations.

  2. Secondly, the higher the degree of cost-cutting, the more disruptions your organization will face. Therefore, companies need to organize their ideas with respect to the degree of cost-cutting they provide. For instance, programs that affect multiple departments will cause almost a 30% reduction in costs. On the other hand, redesigning a process would cause about a 20% reduction. Finally, small incremental innovations would cause only about a 10% reduction in the costs. The company should first choose its target. Then it should analyze its ability to manage the disruption caused by the cost-saving programs. Based on the above analysis, the company should prioritize its cost-saving plans.

How to Do Incremental Cost Cutting?

  1. The first step in any cost-cutting exercise is to get rid of any type of discretionary expenditures. Expenses like holiday parties and other perquisites should be the first ones that the company should look to cut down. In many cases, companies do not cut down on expenses directly. Instead, they combine them. For instance, instead of conducting training for each department separately, the training for several departments can be combined. This helps cut down the costs for the venue as well as the trainers. Companies have reported that up to 40% of the costs can be easily saved by using these techniques

  2. Reducing personnel costs is another way to reduce the overall costs of a company. One of the simplest strategies which the company can use is not to fill the vacant positions. Firing people from their jobs gets the company negative publicity. However, a certain number of people leave the company every year. If the company simply doesn’t replace them, it will be able to save some costs. Also, their workload will get split amongst different employees, which will make other employees more productive.

  3. Sometimes, minor cost-cutting is not enough when companies are going bankrupt. In such cases, the management is forced to bite the bullet and lay off certain people. In every department, there are certain non-performing people. This personnel can either be provided alternate jobs wherein their services can be used more productively. Alternatively, they can be let go, and the resultant cost savings can be used to manage the company’s expenses better.

  4. Terminating personnel is not the only way to cut down costs. In many cases, the pay increases can simply be reduced by 1% to 2% per annum. This decrease is small and hence will not cause massive attrition. However, it will help to bring down the costs. Also, sometimes the promotions due to people can be delayed to save on costs. However, this strategy is risky as it may prompt high performers to look for jobs in alternate companies. Hence, this strategy should only be used when the markets are down, and such options are not forthcoming to employees looking for a change.

  5. Many companies facing bankruptcy have reduced their costs by eliminating administrative expenses. If the department has several people employed, then at least 20% of the total cost is being spent on supervision and administrative tasks. This can be eliminated since it costs the organization doubly.

    First, the organization has to pay managers to take daily updated from the workers.

    Secondly, the organization has to bear the loss of time and productivity when employees discuss their goals with their managers. If the department has been in operation for a long period of time, it should be passively managed using management by exception principles. Over a period of time, the company should reduce the time and expense devoted to administrative activities by at least 10% each year. This 10% reduction might not sound like a lot, but it does tend to make a huge impact on a company facing bankruptcy.

To sum it up, companies facing bankruptcy can cut costs without taking any drastic measures. A lot of small cost-cutting measures would significantly add to the overall reduction in cash flow.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.