by Martin Dunne - Wednesday, 12th November 2008 -

Real Business agony uncle Martin Dunne is the answer to all your accounting woes. Each week he will tackle another problem faced by entrepreneurs. This week: should you let staff go to cut costs?

Q: "I'm expecting next year to be tough. Should I start making redundancies?"

A: Firstly, try and work out what your staffing needs will be for the coming year. A good way to do this is to prepare a profit & loss forecast. At this stage, keep it simple - I would recommend a one-page spreadsheet which shows your expected sales, cost of sales and overheads for each month. Use the overhead categories from your annual accounts: this will ensure that you don’t miss any costs out.

Forecasting future sales is always very difficult, so I would suggest starting with the basic assumption that your expected sales will be the same as the last twelve months. If you think that sales will be less than this year, adjust the figures in line with this.

It should then be easy to determine your cost of sales based on the expected sales figure for each month. Again, you can refer to the level of your current cost of sales (or gross profit margins) as a guide if needed.

Estimating your overheads for the next year should be even easier, as these are generally quite predictable (e.g. you know what your rent commitments are, you know what you pay for utilities each quarter, and so on).

Having done this, you will now have a picture of what level of profit or loss you could expect to make next year, based on current staff levels.

Where you are forecasting a loss, you can use the spreadsheet to identify any other costs that you might be able to trim down (e.g, you might set a limit on entertaining costs) before considering how much staff costs would need to be reduced to produce a profit.

If the expected loss is fairly small, perhaps you can support that in the short term. You don’t want to make people redundant only to have to incur expensive recruitment fees a year or two later, when the economy picks up again.

However, if the expected loss is large, maybe you need to make a tough decision or two. Is it possible that you can deliver your expected sales with a reduced level of staffing, where everybody who remains works a little harder?

Nobody likes making people redundant, but it may be the only way for your business to survive the recession.

Martin Dunne is a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media.

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