Economic cycles (or economic seasons), in particular “economic summer” and “economic winter”, are always talked about, especially in recent years.

Economic history shows us that key events tend to repeat themselves. And, from this point of view, the genesis of all recessions in history is the same.

By now, it has become obvious that the central banks’ handling of the banking sector gives rise to chronic recurring cycles of economic expansion and recession.

Any change in the economic environment – even more so in these uncertain times, when a rather tough “economic winter” is expected to follow – can mean that many organizations are put in the position of cutting overheads and maximizing efficiency.

In most cases, we are looking to make as many savings as possible on company expenses, as this will consequently lead directly to increased profits.

It’s true, when the company spends more than necessary, it decreases profit. That’s why a large number of company directors, and especially business and financial directors, strive to eliminate as much as possible, or at least reduce expenses.

The struggle becomes even more acute when the company is going through a tough period or when the economy goes into recession.

You’re not alone in seeing expenses as the only factor standing in the way of profits.

Over the past 25 years, I have worked for, managed or consulted for numerous organizations in this situation – including manufacturing companies, construction companies, IT services firms, high-tech start-ups, etc… Our experience shows that opportunities to reduce administrative costs follow similar patterns virtually everywhere, in many organizations.

The lessons we’ve learned may not solve your entire problem, but they should give you a fresh perspective.

Expenditure should be divided into 3 categories:

1. Expenses necessary for the activity of the company
2. Expenses not necessary for the company’s activity
3. Expenditure which brings in more income than these or which reduces other expenditure by more than these.

The first 2 categories are considered by most managers and directors. Like people, companies tend (especially in good times) to generate unnecessary expenses and consequently lower profits.

The period when reserves have to be made, debts have to be paid, etc… is precisely the period of prosperity. During this period, we can keep the money saved from reducing those expenses for the next period. In this way we streamline the system, and the company can get through the tougher times that will inevitably follow. Economic downturns are part of a cycle, as is economic prosperity, and these should not surprise anyone.

When there is an economic downturn, we have to spend the money we saved during the boom. During recessions, we find opportunities to invest more profitably, and spending during this period strengthens the company’s image in the market.

The third type of spending is spending that at any time, whether in good times or bad, should be encouraged. If I spend 100 RON and this expenditure generates a net income of 110 RON, or reduces my other expenses by 110 RON, I will increase this expenditure without limit.

Therefore, achieving the illusion of increased profit through uncontrolled expenditure cuts has a real price, paid in one form or another sooner or later.

Write and tell me what you think?