Cost reduction is the process of reducing unnecessary expenses to increase their bottom line. Methodologies and results vary from business to business. However, effective cost-cutting is a dynamic, continuous, and reflective process. Businesses are fluid, and cost reduction needs to follow suit. But, during an economic crisis, businesses need to take very drastic measures to stay afloat. Layoffs, permanent and temporary, are inevitable and necessary to survive. However, there are important areas that should be addressed specifically during difficult economic times.
1. Understand the big picture and your commitments
What will your cash flow be going forward? That’s what it’s all about. Every business should have a model where you can simulate scenarios to understand what your cash flow will look like going forward. What is secured? What can you plan for? Understanding this will lay the basis for understanding how you should manage your cost base. Part of this assessment is to understand your commitments. You need to understand where you stand and what flexibility you have. By quickly identifying your business’ commitments you can target the costs that can be cut or reduced.
2. Manage your direct spend
Direct spend is naturally handled different than indirect as it affects your customer and therefore has a much higher focus within the company. Managing your direct spend will affect how competitive you are in the market as well as build your reputation within the industry. Also, managing direct spend directly affects your profit margins and should be given special attention at all times. Some tips to improve control of direct spending:
- Use budgets and track them – Ensure that the budgets are set up the way you handle your business
- Ensure good procurement processes – An approval process helps avoid costly mistakes. Your customers will not be willing to pay for your mistakes
- Use technology to support your business goals – Manual work processes are time consuming – use your time on value-adding activities instead
- Handle changes professionally – Changes in the market often result in changes in demands from customers. Implement solid routines and systems to handle changes so you do not end up bearing the cost for a client’s change of scope
3. Avoid unnecessary indirect spend
Indirect spend is often a result of very decentralized processes, which is natural. As a result, most companies experience unnecessary indirect spend. Many companies can have great potential for cost cutting in their indirect spend. Some tips to better manage indirect spend:
- Categorize costs – Focus on the most important cost categories. What are fixed costs and what are variable? Negotiate and consolidate purchases for your preferred suppliers. Know your numbers before starting negotiations
- Make it easy to purchase correctly – Give your employees easy access to preferred suppliers and items
- Ensure efficient purchasing approval routines – Indirect spend are often high frequency purchases of smaller amounts. With slow and inefficient approval routines you run the risk of people not following company policies
4. Use budgets and track cost
Budgeting is vital in cost control and should always be a focus area for companies. However, budgets only matter if you track cost and commitments. Too many companies set budgets and analyze their spend on budgets after they get their accounting reports. Leaving them operating blind for a long period of time. Steps in gaining better budget control:
- Get commitments to budget – set it up together with budget responsible
- Structure your budgets – a logical structure that fits your business
- Budgets must be easily accessible – budget status should be easy to find
- Track costs and commitments in real-time – you can not control a budget by looking at historic data only – get an overview of future commitments as well
- Analyze deviations – learn from your successes and mistakes for new budgets
The right use of budgets does not only give you cost control. If can also work as a solid guide for employees, resulting in improved speed in your organization.
5. Work with your company’s spend culture
Some companies have strong spend cultures and these will often be in a better situation to handle challenging economic times like the ones we are experiencing now. A solid spend culture is a long-lasting competitive edge for your company. Tough times can be the perfect time to work with this culture as everybody understands the importance of actions taken. Some areas worth focusing on:
- Focus on spend categories that people easily can recognize
- Install clear guidelines and spend limits
- Implement buying processes and approval flows
- Lead by example
- Make sure that all see results of work done
A solid spend culture is simply put an insurance that you are getting the most out of your resources. It is a long-lasting benefit and could be a competitive edge that your entire organization will benefit from.
Implementing strong cost control routines during an economic crisis implies to increased profit margins in the future. It is difficult to say how long a crisis will last and how it will affect the markets in the long run. Establishing solid cost control routines is essential. Make good decisions that you can benefit from in years to come. Markets have a tendency to bounce back fast after a crisis. Make sure you are in a solid position when that happens.