Growth in Time of Cost Cutting Relies on Creative Strategy.

STRIKING the right combination of cost-cutting and growth strategies is key to the long-term success of your business. If you don't control expenditures and operate as efficiently as possible, your bottom line will be lower than it could be. But if you cut costs so much that you hamper productivity, reduce quality and stifle growth, your revenues and profitability will decline, and you could lose market share to more aggressive competitors.

To find the right balance between cost-cutting and growth-oriented strategies, it's helpful to first examine the various measures entrepreneurs and business owners can undertake to expand revenues or contract the costs of their business.

Cost-cutting strategies usually focus on reducing the costs of supplies and services, and lowering employee-related expenses. One relatively painless step you can take is reduce spending on travel and other perks. Many businesses find themselves financially strapped by overspending on fancy office space, deluxe travel accommodations and other glitzy perks intended to impress clients and competitors.

Another idea is to reduce overhead salaries by employing consultants and independent contractors. Before making any significant changes in worker classification, however, be aware that the independent contractor arrangement has some pitfalls. One unintended consequence of converting a number of former employees to independent status is a possibly negative effect on an existing 401(k) plan. Dropping the participation of your least-compensated employees may cause your plan to be judged discriminatory. Also, changes to your employees' status may create unfortunate tax complications for your business. The Internal Revenue Service may target companies that employ independent contractors if these free-lancers don't pay their taxes.

Year-end bonuses

Some companies opt to give employees year-end bonuses rather than pay raises, thus avoiding a fixed commitment for the following year. A growing trend is the use of temporary workers to support a business' operations. You may find that temporary help can more easily handle stressful, burnout-inducing jobs, such as telemarketing and customer-support, positions. Of course, temps will never be as fully invested in the company as permanent, full-time employees.

These are some steps companies can take to cut costs, but too many reductions can inhibit growth. A heavy emphasis on the cost-cuffing, downsizing and other bottom-line-oriented practices of the past few years has led many companies to understand that an overly enthusiastic implementation of cost-cutting measures can have the unintended effect of inhibiting revenues. More than one company has seen profits increase temporarily due to stringent cost-cutting, only to watch overall revenues plummet because of a lack of growth. Draconian cost-cuffing has also occasionally resulted in corresponding declines in customer service and product quality. For these reasons, you may feel that the best approach for your business is to pursue a growth-based strategy.

Growth strategies can effectively target four major areas: innovations, acquisitions, new distribution outlets, and market share increases.

Innovation in methods and products can be the spark that keeps a business thriving. Sadly, however, only 43 percent of new products or services meet profitability expectations. Consultants believe that insufficient advance research is devoted to developing new ideas. One of the more flagrant mistakes is to call a meeting and have company managers sit around and brainstorm new ideas. Intensive consumer research can inspire ideas that have not occurred to management. Gather the data generated by such research first - then hold some well-prepared management meetings, perhaps at a site away from day-to-day operations.

Acquisitions can improve a company's financial picture through the addition of a financially successful operation. What is most important is to make sure you are truly acquiring added value. That value may not necessarily be in bricks and mortar or a good balance sheet. Does the merger or acquisition add superior technology to your company? What about the employee team that is coming aboard will you be getting an infusion of really top-flight personnel?

Service vs. promotions

One way of increasing market share is to discount or offer rebates on products. The theory is that by cuffing prices and advertising, revenues will increase through a volume sales increase. The problem with this strategy is that it usually provides only a quick temporary boost in sales and does not build any further long-term customer loyalty. More than one company has found a way to expand its market by working to build customer loyalty - not by reducing prices, but by increasing the level of customer service.

Establishing new distribution outlets is well worth the time and effort. The research process in itself clarifies your marketing goals, as it involves setting priorities for the search. Also, by securing new outlets for your business, you will both widen the scope of your territory and find additional business opportunities in each new area you serve.

Before you implement either a cost cuffing or a growth strategy, you need to have systems in place that enable you to track costs, measure productivity, and assess the value of expansion opportunities. It's also advisable to seek the advice of financial and business consultants who can help you analyze your situation and identify your best course of action.

Harvey A. Goldstein is the managing partner of Singer Lewak Greenbaum & Goldstein LLP, a Westwood-based certified public accounting and management consulting firm.