When profits are down, or business is slow, managers are often tempted to cut large cost items such as IT budgets or head count, but such measures will often stifle innovation and put a dampener on growth.
From small acorns great oaks grow and for many companies, the greatest savings are found by examining the smaller costs. ‘Savings equated profit’ can return an average of 15-23 percent directly back to your bottom line, simply through prudent management of cost categories that are overlooked.
The reality is, 90 percent of Australian companies overspend on day-to-day expenses by as much as 75 percent and are leaking profit as a result. Overspending is most common where managers and financial controllers lack the resources, time and specialist knowledge of suppliers markets required to tackle smaller costs.
This is not unique to any kind or size of business, but is experienced from the largest of listed enterprises to the smallest of privately companies because many day-to-day costs are simply viewed as the norm and never challenged.
Time and attention is paid to controlling expenditure on major projects but the devilish detail slips under the radar, eventually adding up to large, often unaccounted for amounts.
Cutting the small costs lifts profits, improves productivity, keeps business-critical projects on the rails and saves jobs. Expert management means you can achieve high savings, receive better products and services, yet not compromise on the value and quality of what your business delivers to market.
Major areas of cost control
The first stage in tackling costs is to highlight areas where savings can be made and drill down into current spending to examine potential profit leaks, usage patterns and market prices.
Telecommunications, business travel, energy, freight, couriers, mail, office supplies, reprographics and stationery, as well as cleaning, merchant card services, maintenance contracts and document storage are categories where overspending is common.
Telecommunications makes up the highest overspending category and staff mobile phones cause a large part of the sting. These costs can easily be cut by up to 30 percent by negotiating on contracts, switching carriers and putting fair usage policies in place for employees.
Cutting costs is only one part of the equation. Implementing and sustaining savings requires companies to have systems, procedures and policies that actively foster a profit culture. Improved inventory management, cost analysis and management tools, better compliance with corporate contracts and keeping staff focused on strategic tasks are just some of the measures used by highly profitable companies.
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To sustain cost reductions, companies must establish new buying and monitoring systems, otherwise costs will creep up again and no process improvements will be made long term. Additional opportunities will emerge as new suppliers introduce fresh approaches and can help enhance competitive advantage, so long as they are properly leveraged.
Diligent day-to-day management helps businesses take advantage of rapid changes in market conditions, such as a dramatic drop in the cost of insurance or air travel. Rolling three-year reviews are recommended as a minimum measure to keep costs in check and make necessary adjustments where needed.
Top Tips for Effective Cost Management
Care about effective cost management. If a company’s staff is complacent about financial performance and cost control, there is little chance that a cost-saving project will succeed. Executives must find the time to take an interest in reviewing expenses and reducing costs—lead by example. Cost cutting should not be allowed to become the ‘flavour of the month’. Remain motivated to keep costs in check on a regular basis. If a cost-management culture is not established, employees will quickly fall back into old habits. It is important to instigate measurable strategies for cost reduction.
Over-confidence can be a killer. Many organisations overspend through sheer arrogance. Don’t assume your costs are under control based on historical data. You are likely to find that your competitors are paying less for the same products. Never assume you know the market as well as your suppliers.
Understand what you are buying. Look at the fine print on contracts and understand what you are getting for your money. Do you really need the add-ons or maintenance agreements?
Talk to your suppliers. Suppliers will price their offerings according to what the market will bear. Inform suppliers that you are reviewing your costs, which have to be reduced, then be prepared to negotiate and shop around.
Keep vigilant. Monitoring your cost management is vital. You need to watch that staff members don’t slip back into old habits, suppliers charge correct prices and service matches the agreed specification.
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Major Savings
The following table shows where Expense Reduction Analysts’ clients made their major savings in 2006.
|
Area of Cost |
Average |
Average |
|
|
Review $ |
Savings % |
|
Cleaning services |
130,000 |
20 |
|
Cleaning supplies |
90,000 |
16 |
|
Couriers |
185,000 |
21 |
|
Factory consumables |
210,000 |
13 |
|
Fleet management |
800,000 |
8 |
|
Food services |
150,000 |
14 |
|
Freight |
280,000 |
19 |
|
Insurance |
196,000 |
21 |
|
Laboratory supplies |
110,000 |
17 |
|
Merchant card fees |
140,000 |
20 |
|
Office products |
132,000 |
23 |
|
Packaging |
170,000 |
14 |
|
|
225,000 |
26 |
|
Records management |
73,000 |
24 |
|
Telecommunications |
139,000 |
21 |
|
Uniforms |
61,000 |
21 |
|
Utilities |
156,000 |
9 |
|
Waste management |
96,000 |
24% |
* Denis Stevens is managing director of Expense Reduction Analysts (ERA).
* The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.
