Budget Cuts, Pay Cuts, and Hair Cuts

May 19, 2009
By Laura Walker for Universal Funding Corporation

The recession scramble to maintain vitality is in full sizzle.  Businesses are stressed, consumers are strapped, and governments are strained.  The solution for all has been budget cuts.  Whether they’ve been quick and dirty or fastidiously deliberated, cutting costs trickles down to touch everyone in line.

Small to medium-size businesses as well as large companies are getting creative in cost cutting because, yes, revenues are down.  But there’s only so much cost cutting a business can do without running an operation in the dark with no workers.  If the costs are as slim as they’re going to get, companies that are still cash short can factor accounts receivable to add working capital to the recipe.

It seems as if every business blog and website has tips on how to skinny down expenditures.  Appraisal Today magazine published a great article in 1994, “51 Ways to Cut Costs and Increase Cash Flow,” which is still very relevant today for more than just the appraisal industry.  The article addresses cash management strategies, pricing design, and tactics to reduce spending.

Staff cuts are usually the last thing a company wants to do, but often they’re the first.  Not saying this is the right thing to do, but employee compensation and benefits tend to be a business’ largest expense.  Whether it’s decreasing hours, pay cuts, or eliminating positions, workers are suffering and these individuals are forced to cut costs in their own personal budgets. 

Luxury expenses or splurge items are usually the first to be forced off of personal budgets.  An April 2009 Ipsos marketing article about consumer sacrifice of new products and usual brands states that “Consumers may dine out less often, visit beauty salons less often, and forego outside entertainment such as movie going.”

I was surprised by how many articles came up in a Google search for “recession haircut” (445,000).  A May 2009 Sacramento Bee news article showed how reducing a $65 haircut to $13 at Great Clips helped a mom slim her family’s budget.  It went on to say, “Overall, spending on beauty products, makeup, hair care and perfume has fallen nationwide, down 2 percent from 2007 to 2008, according to researcher NPD Group Inc.  So-called ‘prestige’ products tumbled 3 percent, while beauty product sales at food and drug stores stayed virtually the same.”

The news headlines all across America (and surely throughout the world) are packed with tales of government budget cuts.  Education, social services, and health care budgets are being subtracted in almost every state because tax revenues are down.  State and federal employee wages are being frozen and many will be cut or eliminated.

The Center on Budget and Policy Priorities published the article “State Budget Troubles Worsen” by Elizabeth McNichol and Iris J. Lav (updated May 13, 2009).  Regarding the financial situation in state governments, the following sums it up well:

The vast majority of states cannot run a deficit or borrow to cover their operating expenditures [as the federal government can]. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes . . . remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn and contribute to the further slowing of the national economy, as well.

So, what happens if state governments financially fail?  Likely results: prisoners could be released early, public servants such as firefighters and police could be laid off, schools closed, infrastructure could fall into disrepair or collapse entirely, and before you know it, we could be on our way to the Anarchy Inn.

California is teetering on the edge of a desperate budget situation right now.  With the worst bond rating of the 50 states, California citizens vote on six special-election ballot measures on May 19th, which are a shaky attempt to minimize the budget deficit by about $6 billion.  The initiatives propose to create a rainy-day fund, move funds from certain programs (education, child-development and mental health) to the general fund, borrow from future lottery revenues, and freeze legislator pay.  According to a recent article in The Economist, “the state will face a budget gap of $15.4 billion if the ballot measures pass, $21.3 billion if they fail.”

Any entity with a budget has already either hacked away the fat, and possibly some muscle, or is now sharpening the cleaver.  Headlines, blogs, and cross-cubical discussions are more often dark and nervous than hopeful these days.  Sorry to end on such a bleak note.