Few business owners enjoy making budget cuts, especially when it means that employees have to be let go. Lean times can erode morale and serve as a sign to some that the business is in trouble. However, when done correctly, budget cuts can benefit a business and leave it in a stronger position moving forward.

Staying Alive

The biggest benefit of a budget cut is that it can help keep a company from going out of business entirely. While cuts aren’t good for morale, it shouldn’t be lost on anyone working there that the consequences of avoiding difficult choices now could be a more catastrophic outcome down the road. Communicating both the rationale for the cuts and a clear plan for how the company plans to move forward can help reassure employees that the future still holds promise

Reallocating Resources Effectively

Budget cuts force a business to make tough choices. In doing so, it’s forced to focus its energies on its core areas, eliminating anything that can’t produce an acceptable return on investment. This can stop the scope creep that small businesses sometimes experience with growth, as they move outside their core competencies to seek additional market share. Requiring managers to defend their funding and make difficult choices about what to prioritize can force them to abandon pet projects that don’t contribute to the bottom line.

Lowered Morale

The obvious negative of budget cuts is their effect on morale, particularly if the process isn’t well-planned. A business owner may want to avoid a single large layoff and let go smaller groups of employees instead, hoping for a turnaround that will save him from so many reductions, but that also can lead to constant fears from those who remain about what’s coming next. Employees constantly being asked to take on additional burdens with fewer resources risk burning out. Freezes on salaries and promotions can leave employees without an obvious way forward in the company, which encourages them to look elsewhere.

Easy to Err

It’s very easy to make budget cuts in a way that seems strategic but has long-term drawbacks to your business that go beyond the short-term cost savings. Getting rid of skilled workers, for example, can leave you without the necessary personnel to ramp up again once the economy improves. Slashing the marketing budget can make it tougher to find new customers, and eliminating training can leave your workers ill-equipped to deal with innovations and trends. Budget cuts can leave you at a disadvantage if they leave your business effectively unable to compete in the marketplace.