What is Curtailment?

In finance, curtailment is a term that refers to actions that are aimed at reducing costs and bringing about a more stable financial base. Companies often make use of curtailment strategies in order to remain viable while undergoing some type of financial crisis, and thus avoid the necessity of bankruptcy or a complete shutdown of the business. Curtailment, which is also known as retrenchment, may involve making changes that are more or less permanent, or designed to remain in place until the current crisis has abated.

There are several different ways to engage in curtailment. The most common approach has to do with a reduction in operating expenses. This frequently comes about by reducing the number of active employees. The process may focus on laying off a portion of the workforce, a move that makes it possible to save on salaries and employee benefits while the company is going through a difficult financial period. This approach makes it possible to call employees back from a layoff when the business emerges from the rough period, and the demand for the goods and services produced increases once more.

Curtailment may also come in the form of permanently eliminating some job positions, and transferring the responsibilities formerly associated with those positions to employees who remain with the company. For example, if the inspection and packing departments of a manufacturing plant were once two distinct entities, a company may choose to combine them into one unified department. Doing so makes it possible to eliminate anywhere from a third to one-half of the work positions and thus save a great deal on wages and benefits.

In some situations, curtailment involves contracting out functions that were once handled in-house. One common approach used by many smaller companies is to reduce the accounting department by contracting an outside service to handle the processing of the payroll, the preparation and mailing of invoices to customers, or even keeping the accounting books for the business. This strategy allows the company to continue managing its finances effectively, but eliminates a great deal of the cost.

Curtailment may also involve spinning off a portion of the corporation in order to generate revenue while also reducing overall operational costs. Sometimes referred to as an equity carve-out, this approach may involve selling off a minority share of a side business owned by the company. The business still retains controlling interest, but benefits from the financial support rendered by the new minority partner, especially with operational expenses related to the ongoing function of the subsidiary.