Cost Management on the face of it looks like another buzz word thrown around by executives and cost management professionals for business owners to reduce their costs. But what about its practicality and, most importantly, when does need to be cost cut.

In our recent experience with the pandemic, every business owner has come to the unanimous decision, cash inflows for many businesses are not absolute and could change at the dime drop. There is thus a need to manage outflows in such a flexible way that they can be replaced with the flows.

In the whole of our past ten years of professional life, we have worked with various professionals in multiple industries, from manufacturing to retail to services. We have consistently observed that cost reduction opportunities follow a similar basic pattern across all businesses.

For every executive or business owner reading this, you have to keep two points in mind.

 

Getting to 10 percent: Incremental Ideas.

Most businesses and organizational departments can reduce costs by 10 percent without changing their interactions with the rest of the organization or market. Some of the most common methods of reduction are:

Consolidate Incidentals

Most companies have already had a try to reduce costs to an appropriate level. This goes especially incidental or non-revenue generating activity costs. This includes holiday parties, event tickets, tuition reimbursements. If that is the situation, values such as this cannot be reduced any further. Instead, evaluate which activities can be consolidated into single operations. Combining activities such as training days and celebrations into unique events and cross scheduling outside resources can help manage costs.

Management of Overdue Personnel

All administrative departments, even those considered efficient, have unresolved personnel issues. These situations sometimes exist even when a round of cost cut has been established. After eliminating unnecessary activities and determining non-viable members of the workforce, a restructuring of the workforce is necessary for jobs that are not working at the best capacity.

over due managementThe first and obvious choice is to terminate any under-performing employees. It is a significant problem that needs to be curtailed, like pruning a garden. After this necessary endeavor, there may still be employees who are doing two types of tasks, valuable but unpleasant and less valuable but pleasant. In our experience, sometimes such employees use any efficiency achieved in the previous jobs that are not carried on to the following tasks.

During our evaluation of the Retail Organization, we observed a similar phenomenon; the company had spent a significant capital making its sales process more efficient. However, the growth in sales that they required and expected had not been achieved.

We evaluated the situation and concluded their Sales Executives spent the free time form streamlined sales process in serving the customers better and reading up on new products rather than phone new customers and selling products [a task which was less enjoyable than the former].
As a solution, we taught the Sales Executives a choice each time they implemented a labor-saving solution: either combine jobs and reduce headcount or increase sales by a measurable amount.

Reduce Spending on Department Management

Many Administrative Departments use as much as 20 percent of their allocated amounts to manage their activities. An evaluation can be done tasks by the Management, which were substantially similar to those that were being done approximately a year ago. It follows that those parts do not have the same level of supervision and can be checked intermittently instead of close supervision. In most situations, a close supervisory function is more or less disruptive for work carried out in the normal function. It should be noted that the supervisor’s treasured role would be encouraging employees and dealing with exceptions to the regular business carried out by a company.

Gain Control of “Miscellaneous” Spending.

In some businesses or departments, its “supplies” in others are entertainment or refreshment expenses, and in others, even its expense out on telecom or computer-related items. In any 15 to 20 percent of costs are found not to have been managed carefully. One particularly glaring example we encountered was in a logistics company where a significant portion was spent on stationery and supplies. The budget could not allow for the procurement of slots on an International Port, which would have a very positive impact on Sales. A simple redistribution of budgets permitted an increase in Sales by up to 10 percent.

Hold Down Pay Increases

pay increaseAlthough on the face, this idea would be the most implemented one, however, it is usually the first one that is overlooked.

This is because every manager believes that the personnel in the department heading are underpaid. A Human Resource

evaluation can be carried out to see where employees stand about their Marketplace. If they are not below the market,

consider holding the average pay increase in your department to 1-2 percent less than last year’s Company average.

Re-propose Rejected Cost-Saving Ideas

The last process that can be undertaken is to look back through the past budgetary measures and cycles carried out and evaluate. Where your department had requested and suggested activities that would increase productivity, be it whether these suggestions required some investment for implementation. These proposals may have been rejected because of cost constraints or other priorities. These proposals can now be re-evaluated for application.

Conclusion

Although these are merely suggestions, it should be pertinent to implement these suggestions to mean the difference between success or failure for an organization in today’s cut-throat business environment. We will also post proposals to eliminate 20 percent and 30 percent of Costs.

For more read Part 2 

What we can do to helpaccounting services

We at HMAS can help you evaluate your business model and tailor-made recommendations that will ensure your survival and growth in the economy.

PART 2

In our previous article, we discussed the importance of cutting costs in the market and how cost-cutting is to be implemented to achieve at least a 10 percent cost reduction in surplus costs.
However, in some businesses, it is apparent that 10 percent of cost reduction is not going to cut it. Maybe the market is going through a severe downturn, or the company’s primary business is now obsolete. Maybe even, as the recent situation in 2020 was, there is a catastrophe on a global scale.

Getting to 20% – Redesign Ideas

Redesigning

Whatever the situation is, a cost reduction of 20 to 30 percent is certainly possible. However, it should be noted that it is mostly impossible to remove 20 percent of the total costs incurred without undertaking a significant redesign in the workflows of a business or an organizational department. Keep in mind that its rarely a good idea to do the same work with 20 percent fewer people.
When eliminating costs to this extent, it should come as no surprise that any work should be eliminated for which cost exceeds the value. But it should be kept in mind that there is still value that is being cut. The first step can be to combine opportunities to reduce the workload and redistribute the workload to remaining positions available.
To eliminate work effectively, rethink your department in three ways.

Communication with Counterparties

In the case of a business department providing in house service to the Companies’ other departments, it’s a good idea to evaluate your workload about those departments. Is the role in providing necessary information to those other groups? Do their deadlines exacerbate your workloads?
If so, then the cost has a considerable chance of exceeding value, because the department requiring the work is not directly bearing the cost of the work. To ensure that the cost you are incurring is justified, the efforts made by your department should be disaggregated and then verified if each effort is justified. This approach, though time-consuming, can reveal many opportunities.

Eliminating Liaisons and Coordinators

Liaisons and Coordinators were created to assume that two or more groups performing different tasks would not be able to understand each other’s work well enough to carry out adequate communication. However, in today’s work environment, this is mostly not the case. The position of Coordinators and Liaisons is mostly important to organizations whose operations are spread out around the globe. For companies and interworking departments which exist close by, their need does not exist.

Reducing Excessive Service Levels

Excessive Service Levels create a significant problem in the process of cutting costs in a business. There has been an instance in our experience where a full-time staff was hired to sift through daily reports and manually highlight any variances encountered even after the fact that many of the variances had been rendered useless due to a systems overhaul.

Change the process

process changing

The administrative process can become frozen over time and thus may cease to become effective or efficient. Evaluation of the following four business areas will help one to understand whether this has occurred and implemented any changes that may be necessary.
It reduced Business Requirements. There is a need to evaluate whether the business requirements have been changed or not. Perhaps the requirement for certain data does not exist anymore. Evaluate if there is a need to redesign the process or not.
Manual Process. Is there any process that needs to be processed repetitively, rather than electronically with little or no human intervention?
Exceptions to the Norm. Do the routine 90 percent items cost much less to handle than the exceptional 10 percent. Redesigning what constitutes as an exception can reduce the burden of the department.
Timing. Evaluate if shifting the timing of a certain task will benefit the cost-saving process or not.

Moving Away from Belt and Suspenders Mindset.

Normally managers are evaluated against no surprises standard. The managers who were considered better than normal were assessed against a no surprises standard. You need to evaluate if the functions in your department are involved in reviewing and reconciling information. These positions are a response from a time when there were significant problems in the data or variances. Even as processes are more and more standardized and computerized, the chances of errors are reduced, these functions remain causing a significant drain to the company’s funds. Consider if the Department or the Company’s review function can be moved to areas that are high priority or high stake.

Getting to 30% or More: Cross-Department and Program Elimination Ideas

cost control

It is highly unlikely that one will find cost saving of 30 percent or more of the existing funds solely within the same department or executing the same programs as before. Contrary to this, it is extremely surprising how much savings can be made by evaluating how a department fits in with other departments of the organization. So, if the goal is to reduce 30 percent or more of the costs, a broader understanding of the organization must occur.

Coordinate Parallel Activities

Many departments in a business carry on functions that are similar or closely similar. In such a scenario, an assessment can be carried out to save costs. An example is the purchase of supplies. Most departments procure supplies on their schedule. If the procurement schedule of the departments can be combined, then the company can avail of the benefit of its purchasing power.

Shift the burden to the most Efficient Location

Of the complaints heard during the Annual Budgeting process, the most common is that a certain department budget could be reduced, but that department has budgeting constraints. Interestingly, when budgeting is taking place, that time is ideal for carrying out cross-department tradeoffs.
Another method of how this problem could be tackled is to outsource activities or workgroups. The case can be made as to whether the needs are so specialized that outsourcing them will not be sufficient; however, this evaluation must be carefully carried out.
Our experience, however, shows that outsourcing can significantly diminish the administrative burden on a company. It should be noted that any change in the organizational structure will be met with resistance. If an outsourcing contract is proposed, the company will most certainly cite security concerns and the burden of creating a contract. However, if several opportunities are presented, then simultaneously, organizations tend to be more willing to face the discomfort.

Eliminate Duplicated Analysis

A problem we have discovered across many large organizations is that most departments are carrying on evaluating the same task from multiple angles [Sales, Marketing, Manufacturing], with each department working not in sync with other departments. In our experience, the most effective and efficient companies carry out such functions in a single coordinated effort. This function is handed over to a single department to be carried out. However, it should be noted that this department will require input from other departments at various stages of the evaluation.

Eliminate Low-Value Meetings and Forums

During one of our assessments, we came across a Company where the upper management was virtually unable to do any task approximately 20 percent of the time due to weekday meetings.
In this case, a cross-department assessment of the meetings can be carried out. The problematic meetings that serve no other purpose than touching base can be re-purposed, consolidated, or eliminated.

Restructure or Cut Cross Department Activities

If the goal is to reduce 30 percent or more of the costs incurred, an unorthodox approach must be taken regarding the reduction of cost. A professional services company for which we carried out the analysis, pride in having the most talented staff available, the time is taken by HR in hiring the staff to meet the criteria set forth did not justify the expenses incurred.
We determined that the six interviewers who were not skilled could be replaced by three interviewers who were more skilled with no change in the candidate’s eventual success. After the implementation of our recommendations, the firm’s performance and cost were reduced.

Eliminate Programs

If the required cost reduction cannot be managed, then another drastic step will be required to be taken. The step will be to remove programs and tasks being carried out by the departments. These will be programs that are the least valuable ones.

Reduce the burden placed on Others

In the end, you should seek out openings to inquire from other departments how you are being overseen. A need to challenge assumptions will be required.

Conclusion

Cost reduction by these percentages is in no way an easy task. However, there is no need to lose hope. If a start is made today, enough ideas can be found to reach your goal.
Both experience and research can indicate that idea generation improves with time and is not a standalone task. It would help if you ensured that the goals you set for each repetition of the cost-cutting process are met in its entirety.
In most scenarios, we observe that when carrying out the unpleasant task of managing cost, the primary tendency is to say this is enough before it is met. You should understand that if an attitude such as this persists, the final goal will most certainly not be met.

What we can do to help

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We at HMAS can help you evaluate your business model and provide tailor-made recommendations to ensure your survival and growth in the economy.

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  • Advice on legal issues and court matters
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  • Advice on repatriation of funds
  • Advice on transfer pricing matters


Accounting Software

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  • Point of Sale Solution
  • Inventory Control Management
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Taxation (VAT)

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  • Controlling trial balance
  • Preparation of annual, half yearly, quarterly and monthly financial statements
  • Preparation of management reports
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  • Preparation & review of accounting manual


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  • Day to day bookkeeping
  • VAT compliance services
  • Payroll and salary administration
  • Management of accounts receivables/customer invoices/payments
  • Management of accounts payable/disbursement/supplier invoices


Consultancy

  • Standard Operating Procedure (SOP)
  • Project Management
  • Project Feasibility
  • Financial Projections
  • Business Evaluation
  • Financial Modelling
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  • Evaluation of Internal Controls


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  • Information System Review
  • Development of IT Strategy
  • Implementation of Off the Shelf ERP
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Business Advisory

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  • Budgeting and Forecasting
  • Merger and Acquisition
  • Joint Venture and Business Sales
  • Physical Verification of Assets
  • Cost Management and Reduction


Human Resource (HR)

  • Recruitment of staff
  • HR Policies and Job Descriptions
  • Payroll Services
  • Employees Benefits Plans
  • Succession Planning