November 2nd, 2016
Importance of Cost Management
SAVE TO GROW: The Importance of Cost Management
Business overheads, most notably energy costs, have steadily risen over the last few years and companies have found that whatever improvement in turnover has been eroded away by the increase in their operating costs. This leaves a rather flat or sometimes deflated profit margin.
Smarter companies not only look at ways to increase their turnover, they also look at ways to cut their operating costs in order to grow their bottom line. With the Nigerian economy officially declared to be in recession, a company that has better control of its overhead will have a competitive advantage over its competitor that does not.
As Benjamin Franklin said; ‘’beware of little expenses. A small leak will sink a ship’’.
In the past, for some companies, reducing costs has been a simple cut in head count as that has been their biggest overhead. However, they have often ignored the many other business cost areas that can also be reduced or better managed. A reduction in business cost can have more effect on a company’s profitability than an increase in sales. This leads to the important question: how many more sales must I make to give me the same bottom line result as a reduction in costs.
The primary aim of cost management is to reduce a company’s product unit cost and overhead, whilst at the same time maintaining, and where possible improving service levels to improve cash flow and to enhance profitability. In addition, as part of process there will often be opportunities to reduce consumption as well.
There may also be some easily identified cost savings that may only require a simple tweak in both spending and using habits. A common problem with not having a cost management strategy is that when costs are reduced it is often rushed either on an ad hoc basis or as a reaction to an adverse event that necessitates a quick saving, sometimes at the expense of service levels. This may then lead to further problems and wasted time spent resolving issues that arise as a result.
Once a cost management strategy has been agreed upon there are some simple steps to take that will help to get the biggest financial benefit out of the process.
FOUR COST MANAGEMENT TIPS FOR BUSINESS OWNERS
1. Know your current position and the market.
Gather all the data available and establish, in detail, exactly what prices are currently being paid and what service level are received. This information will be the ‘benchmark’ against which potential suppliers will be measured. This also provides valuable management information which may lead to simple process changes or identifying redundant costs. Be aware of who are the main suppliers in the particular market, what has been happening to prices, how might the market have changed since you last conducted a review and what service level can you expect.
2. Conduct a proper tender exercise.
Take time to do it properly. Start the process a reasonable time before any current contracts are due to expire, give as much details as you can about the nature and amount of your expenditure in a particular cost area, include a number of suppliers with whom you have had contact, provide a clear deadline and above all, negotiate. It is often the incumbent supplier who as a result of the tender process revises their costs downward and retains the business. Although in these times, deconstructing the overall operations strategy or questioning otherwise “default mode” decisions may be more efficient and ultimately more rewarding for the business.
3. Ongoing management.
Be vigilant in checking all invoices and ensure that any agreed prices have been applied correctly. Ensure awareness of development and price changes in the market that could lead to further opportunities to reduce costs and importantly, conduct reviews at least every year.
4. Employee support.
Crucially, get employee to support the cost reduction strategy that are implemented and also where applicable change working habits and processes to reduce unnecessary consumption. Reducing business costs should be made the concern and responsibility of every employee.
The effectiveness of a company’s success is based on its vision, strategy and targets. The efficiency of a company is based on its costs, and unfortunately, too many companies do not currently give sufficient priority to this area.
As a business, we understand the business landscape has changed and it cannot be business as usual. These days, most companies have procurement teams leading cost reduction strategies, which delivers results. However, we think business strategists or consultants should lead this change because cost management requires a more holistic approach. Sometimes, long term growth (even in recession) depends on changing the status quo completely.
So you’ve cut your marketing budget in 2016, must it be spent in exactly the same way it was before the cut only now with lower absolute numbers? Or should the entire strategy be deconstructed for today’s audience, market conditions and growth plan?