FINANCIAL MANAGEMENT - 29.10.2020

When you’ve got to cut costs now

Your latest forecasts indicate that the pandemic is continuing to affect sales. Your business has already been through one round of cost cutting at the start of lockdown, but you’ve been asked to suggest further cuts. Where do you start?

Cost savings

As financial controller, you run a tight ship and where possible you cut costs. But the directors are now asking you to find an additional 10% in administrative cost reductions.

Tip. Forget about finding a single idea that would radically change the cost structure of the business and solve your problem in one go. Instead, you should plan to reach your goal with a combination of ten or more actions.

Tip. The degree of business disruption caused by your reductions will usually be proportionate to the degree of cutting you do. Therefore, you should look for incremental cost-saving ideas that will have minimal impact on the business. What kinds of incremental reduction should you be looking at?

Consolidate incidentals expenditure

Unless cost cutting is new to the company, you’re likely to already have done away with most discretionary expenditure. If that’s the case, don’t try to eliminate more - you probably can’t. Instead, see if you can consolidate what’s left.

Tip. Combine activities like training days and staff events into single occasions and see if you can cross-schedule the use of outside resources such as facilities and speakers.

Keep down pay increases

Though this idea seems obvious, it is usually overlooked as department managers often believe (inaccurately in many cases) that their staff are underpaid.

Tip. Check with a recruitment agency to see where your employees stand relative to the marketplace. If they are not below market, consider keeping the average pay increases to 1% or 2% less than last year’s company average.

Reduce department management costs

Departments, particularly those with more than 20 employees, can use as much as 20% of their budgets to supervise and co-ordinate their own activities.

Tip. Ask each department head to determine which parts of their department are performing essentially the same tasks that they were a year ago. Those parts probably don’t need the level of supervision they once did. As a rule of thumb, you should be able to reduce the number of hours devoted to supervision by about 10% in each year that the department’s duties remain largely unchanged, as long as there has been little staff turnover. But to gain value from this reduction, you must ensure that the supervisors’ actual work contributions are also increased.

Re-propose rejected cost-saving ideas

Finally, look back through previous productivity-enhancing suggestions that required small investments. They may have been rejected because of constraints or other priorities. This often happens, for example, when initiatives require system programming and IT’s resources are tied up elsewhere. Now could be the time to re-propose those ideas.

Focus on incremental cost-saving ideas that will have minimal impact on the business. For example, you could combine activities like training days and staff events and keep down pay increases. You may also be able to cut the number of supervisory hours so that the supervisors can do more work.

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