Shifting into Cost-Cutting Mode

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6 million, 90 employees, and plenty of work repairing systems in New Orleans damaged by Hurricane Katrina. But later that year, when a customer failed to pay for a job, he says he turned to factoring (BusinessWeek.com, 10/3/08) to keep his business going.

"Instead of taking the hint that if I'm having to factor my receivables I really need to scale back, I just kind of went forward," Welton says. He resisted layoffs at first because he didn't want to put people out of work. "These people have families that depend on their job," he says. But he has had to cut anyway, shrinking his staff to just 20 people now.

He is taking other measures, too. WelTec uses GPS devices in company trucks (BusinessWeek SmallBiz, 8/22/08), and has started charging workers for any personal use of business vehicles. Welton has also pulled some trucks off the road so he does not have to insure them. He hasn't turned on the heat yet. And he stopped taking a salary last month, even though he's facing home foreclosure.

Avoiding the "Death Spiral"

Companies that fail to control costs often run up debts, and then servicing that debt then becomes another cost that cuts into profits further, says Chuck Doyle, managing director of Business Capital, a San Francisco turnaround firm working with WelTec. "Some of these people, they just wait too long until there's nothing left to give," Doyle says. "You get into a situation where you're in a death spiral unless you do something." Welton hopes to keep his business going and repay his creditors.

Chatel, the housing contractor, says he was lucky to recognize his problem and abandon his expansion plans at the end of his three-year lease. Shrinking the company turned out to be more profitable than trying to expand it. "As soon as you eliminate all that waste, it trickles down straight to the bottom line," he says.

For more cost-cutting strategies you could employ in your own business, flip through this slide show.

Tozzi covers small business for BusinessWeek.com.