Effective Cost Cutting - Cut What Can Be Cut
Some costs are easier to cut than others. Learn what are the “nice to have” as opposed the “must have” costs. These will depend on the individual business, its product, staff and customers. Some costs may provide the features that distinguish your business from others in the eyes of your customers and to cut these may lose an important differentiating factor.
Corporate giveaways could be a sensitive point, but they may have to go or become cheaper, along with advertising and sponsorship of non-critical events. You may be able to reduce print costs by setting up product/service brochures online and letterheads on your word processing software. Technology enables all businesses to be much more paper free than ever.
You may be able to negotiate reductions in fees or better credit terms from suppliers of goods or services. Look at finance and banking costs, along with accountancy and legal fees. Someone is usually willing to do a deal, and no one wants to lose a good paying customer in hard times (remember, you represent cash to someone else as well). Make sure that you know what’s out there and what you get before you terminate a relationship with a supplier of quality input.
You could sacrifice quality of raw materials, resulting in a lower-quality product. This may or may not be acceptable to buyers, so be aware that you may end up with increased returns of unsatisfactory goods which reduce your cash flow (and reputation) if they don’t like the new product.
Investing in new technology may mean that you can use less experienced (cheaper) staff in some jobs. However, if they need to make decisions or resolve problems for which the computer isn’t programmed, customers may become dissatisfied and look elsewhere if their problem isn’t resolved to their satisfaction. “The computer says no” is not a valid reason for poor service.
Some organisations have offshored parts or all of their process to cheaper areas. UK companies who moved their customer call centres overseas have experienced complaints that call centre staff are difficult to understand or inflexible (among others). At least one bank has moved its call centre back to the UK as a result. If you can’t keep control of the quality of a product, you lose business (and cash) in the long run. Here’s where local competitors may steal your market.
Redundancies have associated direct disadvantages such as redundancy payments and legal costs. Added to this are: costs of management time in counseling those made redundant, reduced morale of those who are left behind to manage increased workloads and potential dissatisfaction amongst customers if service levels fall or their “favourite” contact is chosen for redundancy.
Minimise potential “fallout” from cuts by communicating. Let your staff, customers, suppliers and other stakeholders (e.g. accountant, bank) know what you’re doing and why. Life will be easier if you have their support, and if times are hard, they will understand your reasons.
I recently read a fascinating book by Lara Morgan – former owner of Pacific Direct - in which she advised “cut once and cut deep”. She gives a great framework for reducing headcount in a sensitive but practical way. Her book
More Balls Than Most shows how she went about it and the emotional pain it caused her.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.Labels: Crisis Management, Customer Care, Risk, Selling, Strategy
Effective Cost Management - Understand Your “Burn Rate” And Cost Base
Do you know how much you spend, and on what? Surprisingly, many often don’t. When they find out, it’s a shock. As long as the money has been coming in and the business has made a profit, they’ve been happy. Your “burn rate” is how much cash you need every month just to keep the business running in its current state after meeting costs of sales (i.e. what you need for the "other expenses", which for me includes depreciation).
Some costs are “fixed” (they don’t change depending on the level of business – rent, for example). Others are “floating” or “variable” (they rise and fall depending on business volumes). Ideally, a business needs as many costs as possible to be “floating” so that when times are slow, costs are low. One example of this is sales reps who are paid a low (or no) salary but make their money on commissions from sales. High sales mean high levels of commission (and high costs).
For an organisation with a high proportion of fixed costs, when times are good, profitability will be good because the bulk of costs are fixed. However, when times are bad, painful decisions have to be made.
An organisation with a high proportion of variable costs may see its profitability increase during hard times as its cost base will reduce significantly.
In reality, the nature of the business determines the proportion of fixed and floating costs. Where there is a higher proportion of fixed costs, you need to understand what can be reduced, by how much and how quickly without significantly impacting product or service and driving away paying customers. Simply making 10% of staff redundant across the board doesn’t necessarily do it if the ones that go are the ones that add value.
There are costs that add value and those that don’t. For example, sales people and customer service people add value because they make the sales and look after the customers who buy products/services. However, they may be the first in the “firing line” because they cost more. Understand which staff and departments add real value (cash) during hard times, and you know where to make headcount cuts.
One way of determining essential costs is to map the processes that result in products or services for which customers pay. See who and what is directly involved in the sourcing, production, delivery and collection of cash for these. Next, see who is peripheral, e.g. what IT, Admin, HR and legal/compliance support is needed for those directly involved. You will come up with a chain of those closest to and furthest from the action and those that add the most and least value.
The trick is to determine during the good times what you can cut without significantly impacting your cash flow. Have this plan ready for when times change.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.Labels: Crisis Management, Customer Care, Productivity, Risk, Strategy
Manage Your Costs Effectively
In hard times, businesses all look to cut costs. Some do it well; others end up “throwing the baby out with the bath water”. Why?
My experience (from watching others and myself) suggests that because of the pressure to cut costs (and fast), people risk making poorly thought-out decisions. They forget that what matters is CASH, not cost cutting. You can cut costs, but not safeguard cash flow.
Cash flow is about money in and out. You work to make sure cash comes in to pay the bills when they’re due (cash out). You maximise what comes in and minimise what goes out. Cost cutting is as much an art as a science, and cutting a cost may actually cut off the cash that it generates.
All-too often, it is left to people who may have little idea of the actual business, of what drives the true value that it gives to its customers and of what brings in the cash. Staff, services or products which, at first sight seem expensive, are cut without realising that it is these staff/services/products that may be “loss leaders” which draw customers in to purchase more value-added services/products.
So, you need to start with:
Understanding The Business:
What is the organisation there to do and how does it do it? What values does the organisation adhere to? What products/services are produced/provided, and how? Which are the “loss leaders” that draw in the buyers? Are any obsolete but kept on for “sentimental” reasons? Do all employees from the top down understand why the organisation exists and what its customers truly value about it (i.e. what keeps them coming back and buying more)? Do they understand what generates cash? To answer these questions, you need to talk to those who matter – your customers and the staff who serve them.
An interesting example I saw in one Asian country recently was that supermarkets did not give out free plastic bags for groceries at weekends. Not only did this save them money (as many more people do their grocery shopping at the weekend), it saved the environment. The free plastic bags are a cost and, whilst useful, can be substituted for other more robust ones that can be used again and again (and are sold in the supermarkets). What customers valued (and needed) was the food and household products sold. They continued to shop.
I have spent more than half my life working in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy and work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.Labels: Customer Care, Productivity, Strategy
