CONTROLLING COSTS - 11.01.2012

Deciding what to cut

Cost savings

Costs are incurred through the activities that the business chooses to engage in and, therefore, there are essentially two ways to make cost savings: (1) work out the cheapest way to carry on doing what you’re doing - we’ve previously shown you how to save money by selecting the best suppliers and looking at the alternatives available to your business for procuring goods and services; or (2) decide to cease some of the activities the business currently engages in. But how do you decide what to cut?

Step 1. Cost breakdown

Start by analysing your P&L account in detail to identify precisely what you’re spending money on in each of the P&L line items.

For example. Within the P&L expenditure account “Consultants”, you identify these areas of spend:

• an HR advisor, an ex-member of the personnel department, bills a monthly retainer for general HR advice but is rarely seen
• a corporate finance advisor is paid quarterly to spot potential acquisitions
• an IFA is paid an hourly fee every time he meets your employees for a status catch-up
• a stress consultant is paid monthly to meet staff members who complain of being stressed
• a design engineer who solves client problems receives a monthly retainer.

Step 2. Cost categorisation

Once you’ve broken down the make up of your P&L cost headings, sort them into five categories:

1. Legacy.
2. Not required.
3. Nice to have.
4. Adds value to the business, its people or clients.
5. Required for the business to operate.

“Legacy”. Historical accidents often result in legacy expenditures and eventually no one really knows why the business is spending the money or what it’s receiving in return, e.g. the HR advisor in the above example. Tip. Legacy spending is the first area you should be recommending for cuts.

“Not required”. Some cost elements end up not being required anymore. Taking the example above, in the current economic climate, your business isn’t in a fit state to make acquisitions so the corporate finance advisor will have to go.

“Nice to have”. In the example, the IFA is likely to fit into this category because you probably don’t need status catch-ups for your staff to stay in business. Nice to haves are often the hardest area to cut because, to some people, they are considered essential. But as financial controller, you should still put them on the list of potential cuts.

“Adds value” and “Required”. The stress consultant is likely to add value to the business by improving staff productivity and the design engineer is obviously required to assist clients so these are both costs that you wouldn’t want to cut in a hurry.

For a sample cost saving selector, visit http://financialcontroller.indicator.co.uk (FC 04.04.03).