Restructuring Your Cost Base in a Downturn
By Sarah Petty, Founder Olive Business Partners
When revenue is growing, cost structure rarely feels urgent. Expenses accumulate, teams expand, and commitments build. The business feels busy and that busyness can mask how exposed the underlying structure has become.
When conditions shift through a slower quarter, a lost client, or a market contraction, that exposure becomes visible quickly. The businesses that navigate downturns best are usually not the ones that cut fastest. They are the ones whose cost base was built with flexibility in mind before things got tight.
Understanding the difference between fixed and variable costs is where that flexibility starts.
What fixed and variable actually mean
Fixed costs are the commitments that stay the same regardless of how much revenue comes in. Rent, salaries, software licences, insurance, loan repayments. They run whether the business is at full capacity or a little quiet.
Variable costs move with activity. Contractor fees, cost of goods, delivery costs, commission, some marketing spend. When revenue drops, these costs should, in theory, drop with it.
Most businesses sit somewhere in the middle. They have a core of fixed costs that provide stability, and a layer of variable costs that flex with demand. The problem arises when too much of the cost base becomes fixed without a corresponding level of reliable, recurring revenue to support it.
Step one: Map what you actually have
Before restructuring anything, you need a clear picture of your current cost base. Pull your last three months of expenses and sort every line item into one of three categories.
Truly fixed: committed regardless of revenue. Lease agreements, permanent salaries, debt servicing.
Truly variable: directly tied to delivering revenue. Materials, freelancers, fulfilment costs.
Semi-variable: costs that have a fixed floor but increase with activity. A part-time team member whose hours flex, a software plan that scales with usage, a marketing budget with a committed minimum.
Most business owners are surprised by how much sits in the fixed column once they do this exercise. The semi-variable category is also often larger than expected, and worth examining closely because it tends to carry hidden rigidity.
Step two: Calculate your break-even at reduced revenue
Once you have mapped your costs, stress test the structure. Ask what happens if revenue drops by 20 percent. Then 30 percent. Or more.
At what revenue level do your fixed costs alone consume all gross profit? That number is your true floor, the point at which the business stops being viable without drawing on reserves or taking on debt.
This is not a comfortable exercise but it is a necessary one. Knowing your floor in advance gives you time and options. Discovering it mid-crisis does not.
Step three: Identify where flexibility can be built in
Not every fixed cost can be made variable. But most cost bases have more flexibility available than owners realise when they look carefully.
Some things worth examining:
Staffing: Permanent headcount carries the highest fixed cost risk. This does not mean avoiding hiring, it means being deliberate about what roles need to be permanent versus what capacity can be structured as fractional, contract, or project-based. A business with a higher ratio of variable labour to fixed salaries is significantly more resilient when revenue softens.
Leases and premises: Long commercial leases made more sense when businesses needed a fixed location to operate. Many service businesses now have more negotiating room than they use. Shorter terms, break clauses, and hybrid arrangements are worth reviewing at renewal.
Software and subscriptions: These accumulate qin the background and rarely get reviewed. A subscription audit once or twice a year will almost always surface tools that are underused, duplicated, or no longer earning their place. Cancel or downgrade before you need to, not during a cash squeeze.
Supplier and contractor terms: If your cost base includes significant supplier spend, review payment terms and whether volume commitments still reflect your current needs. Locking in volume for a discount makes sense when demand is predictable. When it is not, the flexibility may be worth more than the saving.
Step four: Shift the ratio deliberately over time
Restructuring a cost base is not usually a one-time event. It is a gradual recalibration made through the decisions you take on renewal, hiring, and contracting over time.
The goal is not to eliminate fixed costs. Some level of fixed cost base is healthy and necessary for stability. The goal is to ensure that your fixed commitments are covered by a level of revenue you can reliably count on, and that beyond that floor, more of your cost structure moves with your business rather than against it.
A useful benchmark: if your most reliable, recurring revenue covers your fixed costs with room to spare, your business has a defensible base. If it does not, that gap is the risk worth addressing now.
Step five: Review the structure in advance
The businesses that restructure under pressure are always working with fewer options. Redundancy negotiations, lease breaks, and contract renegotiations all take time and often carry cost. Doing the work in a stable period means you negotiate from strength rather than necessity.
Build a simple cost structure review into your annual planning cycle. Not a line-by-line budget, but a deliberate question about whether the ratio of fixed to variable still reflects the level of certainty you have about forward revenue.
If the answer is no, that is the signal to start shifting one decision at a time, before conditions force your hand.
Sarah Petty is the Founder of Olive Business Partners and has worked with businesses at every stage of growth, from early-stage startups to multi-billion-dollar global organisations. She brings CFO-level thinking to small business owners who want clarity, control and a business that actually makes money. Sarah is known for making finance practical, commercial and also human.