How to Cut Costs using a Strategic Cost Reduction Approach
A quick and simple way to cut costs in your organisation is to dive headfirst into a review of your operational expenditure and willfully cut costs. You might let some staff go, implement a 10% salary reduction across the board, introduce a recruitment freeze, cancel spending on staff training, or cut marketing spend to the bone.
No cost should be a 'sacred cow'
As a short-term tactic, all of the above will help to cut costs. However, the end-result may do more harm than good to your business over the medium to long-term. Unfortunately, for businesses most impacted by the COVID-19 lockdown restrictions, you might be left with no option other than to take such a drastic action. This blog focuses on how you could use a strategic cost reduction approach to help cut the costs of your business, without needing to resort to such draconian measures.
Before we look at strategic cost reduction techniques, it is worth understanding the difference between strategic costs and non-strategic costs. Strategic costs are costs that can be directly linked to the sales and profits in your business. These may include salespeople, marketing, and research and development expenses that lead to the development of a profitable product or service.
Non-strategic costs on the other hand are other costs required to run your business that you cannot directly link to sales and profit, e.g., office supplies, rent, rates, and utilities.
No cost should be a 'sacred cow' and all costs should be up for grabs and justified, and not simply an exercise in incrementally increasing or decreasing what you spent on that item last year.
An effective strategic cost reduction project should start with a review of your balance sheet, with cash management in mind. You'll want to examine the following:
- Capital Expenditure
Is this expense line receiving the level of scrutiny it deserves? Will the money spent here directly drive sales and profits or is it being spent on 'nice to have' projects? No point being penny rich (operational expenditure) and pound poor (capital expenditure).
- Plant, Property & Equipment
Do we really need to buy a new car, piece of office furniture or laptop, or can we get another year or two out of the perfectly fine car, desk, chair or laptop we purchased two or three years ago. If we must buy new assets, can we recycle old assets across our staff.
- Working capital management
Do you know how long it takes from the day you purchased raw materials until you receive payment from your customers for the goods sold. Can you relate this back to your inventory days, debtors' days, and creditor days? For example, if you reduce inventory and debtors' days by 15 days and increase creditor days by 15 days, you will reduce your cost of sales by 12% this year.
Strategic cost reduction ... it is not a cost-cutting or operational expenditure review exercise.
Next, you should consider the strategic cost reduction techniques you use across your income statement, and not just at an operational expenditure level. Let's examine some possibilities.
Can you develop and sell new products that will help keep cash coming in during the COVID-19 lockdown period? Consider Sluamor.com when you're ready, if you need to find third-party resources to help you win more business.
Here are a few examples of how other businesses have adapted:
- Whiskey distillers are producing hand sanitisers for the Health Service Executive (HSE).
- Sports clothing companies are making personal protective equipment (PPE).
- Retail stores are offloading last season’s stock using an online marketplace.
- Training companies have moved from face-to-face seminars to webinars.
- Cost of sales
Have you spoken to suppliers and arranged different payment terms during the lockdown period? Do you know how much your competitors are paying suppliers for raw materials? Can you get the same rates as your competitors if they are paying less than you?
Has your insurer given you a rebate for the fleet that has been sitting idle in your yard for 8 to 12 weeks during the lockdown period? Can you avail of refunds on insurance products that haven't been fully used by you right now?
- Payment holidays
Have you availed of payment holidays on loans and taxes? Did you apply for wage subsidies and other supports from the Revenue Commissioner? Have you spoken to your landlord and negotiated better terms?
- Group purchasing schemes
Can you join group purchasing schemes and avail of group discounts for non-strategic costs (e.g., utilities, office supplies, some IT spend)? Consider Sluamor.com when you're ready, to find potential suppliers.
The above suggestions are only the tip of the iceberg in what can be achieved when you undertake a strategic cost reduction review of your business. So, don't lose out. Get going today. Want a quick recap, here goes:
- Know the difference between strategic costs and non-strategic costs.
- No cost is sacred, take a zero-based budgeting approach, i.e., justify all costs when budgeting for the year ahead, or when reforecasting, avoid incremental budgets.
- Strategic cost reduction includes reviewing your balance sheet and revenue streams. It is not a cost-cutting or operational expenditure review exercise.
- Know the relationship between cost reduction and cash management, especially when reviewing the balance sheet.
- Use a strategic cost reduction exercise as a lean continuous improvement process to help transform your business.
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