5 small-biz expenses to cut, and 5 to keep

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When business is down and cash flow is tight, you have to reduce expenses to keep your doors open.

“For smaller businesses, panic sets in almost immediately when sales begin to slump or when payments from their accounts receivable slow,” says Dennis J. Ceru, professor of entrepreneurship at Babson College and owner of the Strategic Management Associates consulting firm. “The natural tendency is to look for any and all places to cut expenses.”

But cutting the wrong expenses can cost you money. Here are some expenses not to trim; followed by ways you can save money.

5 cuts that cost you

1. Hold the mayo, not the marketing. “A lot of businesses automatically cut advertising,” says Victoria Colligan, founder of media company Ladies Who Launch and co-author of “Ladies Who Launch: Embracing Entrepreneurship and Creativity as a Lifestyle.” “It’s the easiest thing to cut. You know you can survive on your steady client base. But even during an economic downturn, you want to lay the foundation for expansion.”

If you continue advertising, you’ll be poised to pick up new customers when the economy begins to turn around. “No one knows when the economy is coming back,” Ceru says. “When it does come back, it tends to come back rather quickly. You could miss the beginning of the uptick, when small businesses in particular have an opportunity to gain new markets, new customers or increase their market share.”

Make sure your advertising reaches your potential clients. “If you do your research, you can find relevant, targeted Web sites to get your name in front of your audience without cutting advertising altogether,” Colligan says. “Online gives you the ability to interact with your customer and allows for a much more targeted niche approach.”

2. Don’t terminate training. Training can save money and help you build a better work force. “Labor is cheap right now,” Colligan says. Instead of hiring the most experienced, most expensive applicants, “Find smart people and then train them,” she says. “If you’ve been doing your own books, you may be able to train someone else to do them for $10 an hour.”

In addition to training work skills, train your people to build relationships with their fellow employees and customers. Teach employees to resolve problems by going directly to co-workers instead of gossiping or complaining, says Roxanne Emmerich, author of “Thank God It’s Monday.” For dealing with customers, have employees answer the phone with an attitude of helpfulness. Emmerich’s example: Compare calling a business and hearing: “ABC Widgets, can I help you?” to “Thank you for calling ABC Widgets. This is Julie. How can I assist you today?”

These simple changes, the kind you’d be tempted to scoff at, do make a difference and build your bottom line, she says. “I worked with a bank that hadn’t grown more than 2 percent a year, then it grew 2 percent in one month,” Emmerich says. “The CEO sent me a letter saying, ‘It’s a miracle.'”

3. Salary reductions are risky. If you cut salary and benefits, morale will drop, employees will feel devalued, may not perform well, and may look for new jobs. “Research has shown that employee dissatisfaction is a higher motivator for seeking a new job than pure advancement or new opportunities,” Ceru says.

Instead of cutting salaries, delay raises and expand workers’ roles. “You don’t have to go with the standard raise every year,” Colligan says. “A lot of times your worker bees can handle more than what’s been given them,” she says. “Have them manage two different jobs.”

4. Safety is not a safe cut. Don’t be tempted to cut expenses that keep your employees safe on the job, Ceru says. “Let’s say you are a manufacturing facility that works with hazardous materials and you have respirators with filters,” he says. “You’re tempted to not replace the filters as frequently as you should.” But that puts employees at risk.

5. Don’t quit on quality. Using less expensive but lower quality materials and/or taking shortcuts to get the product completed faster is a bad idea because you risk an inferior product, Ceru says. “Anything that has an effect on the end user is probably not a good idea,” he says.

5 cuts that count

1. Dial up savings. Negotiate with all your data service and telecommunications providers for lower rates, Ceru says. “The plans change about every six months,” he says. “If you can cut telecommunication expenses even by 5 percent, that contributes directly to the bottom line.”

2. Dial down for more savings by cutting gadgets. “How essential are smartphones or BlackBerries for every single person?” Ceru asks. You may benefit from higher productivity, too. “There are numerous studies that show most employees waste a significant amount of time reading and responding to e-mail,” he says.

3. Compute more savings. When it’s time to replace computers, downsize to small, less expensive netbooks, Ceru says. “It’s possible to maintain productivity, efficiency and quality in a less expensive computer,” he says.

4. Create performance-based partnerships and incentives. “Instead of hiring someone on a base plus commission, hire with a commission-only structure,” Colligan says. “This forces people to become vested in the success of your business. You can get people now. There are so many layoffs and people are struggling for work.”

Instead of cutting salaries and benefits, defer raises and bonuses. “Let employees know that when profitability returns, you’ll pay those bonuses,” Ceru says.

5. Track expenses. To identify areas to cut, write down every expense for three months, Ceru says. “It’s no different from what a financial planner would recommend to an individual,” he says. Find the business equivalent of that $4.50 double latte every day that you don’t need. “Owners of small businesses need to know what they’re paying for every single line item,” Ceru says. “The closer understanding they have, the better they are to know what is essential and what is not essential.”