Cost reduction in companies is always a goal, but it is becoming an urgent need as organizations’ margins shrink worldwide. Some contributing factors include government pressures, rising taxes, new competitors, increasingly demanding customers, issues now such as ESG (environmental, social, and corporate governance), shortages of skilled labor, and supply chain problems.
Therefore, reducing costs and expenses is the top priority for companies. And when we talk about reducing costs, we immediately think about laying off employees.
Before we start, let’s clearly understand the differences between costs and expenses. Then, we will discuss the reasons why we are looking to make a cost reduction in companies.
Cost is any value applied in producing a product (in the case of manufacturing companies) or in providing services (for service organizations). Some examples of costs are labor, raw materials, inputs, as well as the amount spent on the production of this product or the provision of this service with electricity, maintenance, depreciation of machinery and equipment, cleaning, and conservation materials, among others.
In addition, costs can be classified into:
Expenses include all the amounts spent by the company to keep it running.
Usually, the expense is related to everything spent in the area of sales, finance, administration, human resources, systems, marketing, and the BackOffice in general. Therefore, expenses are a type of expenditure that has no direct connection with the company’s “core” activity, such as producing goods or providing services.
However, even if they do not contribute directly by generating new items to be marketed, expenses play an important role and certainly their use can have an influence on increasing the company’s revenue.
And in turn, expenses can be classified as fixed or variable:
In this context, it is worth noting that expenses are costs and expenses in general. And typically, when someone talks about reducing costs they are talking about “reducing expenses”, but in a “colloquial” way. Thus, it is worth remembering that it is also essential to analyze the possibilities of reducing expenses in the organization.
Want to understand in more depth? Click here and read 5 tips to improve your expense and spending control.
The question above is very simple, right?
But its answer is inversely proportional, proving to be extremely complex.
Reducing costs is one of the greatest allies of profitability. Every company seeks to reduce costs without measuring efforts, but as we mentioned, it is a very complex task. We must be aware that when reducing costs, we must always be cautious not to cause negative impacts and end up in deficit.
To better understand how to adopt a cost reduction strategy without negatively impacting your results, click here and read our full article.
Were companies that attempted cost-cutting satisfied with their initiatives?
Not always: research by the US Conference Board found that of all the companies that have tried to cut costs:
A study by Deloitte showed that 75% of companies that laid off employees to reduce costs had to rehire others for the same positions within one year.
Another survey, this time by McKinsey, showed that only 10% of cost reduction projects were successful three years after implementation.
But why did these reduction initiatives fail? Surely because of the lack of a better understanding of how resources were consumed in organizations. The natural consequence of not measuring properly is the inability to manage well.
To solve this problem, see 8 actions that will reduce your costs and, consequently, increase your profits:
But the main lesson of all is: understand your costs.
Not understanding exactly how much a product, service, customer or channel costs ends up damaging the entire decision chain of companies! Definitions such as what prices and tariffs to practice, which customers to serve, what discounts we can grant and what commissions to pay our salespeople among many others go through a real understanding of costs and the ability to measure them properly!
Did you know, for example, that between 20% and 40% of products and services make a loss? And that 20% of customers are loss-making? See more on the subject in this article dedicated to service costs!
So, it raises the question: what actions will we take immediately after identifying bottlenecks in our organization?
Sergio Marchionne, the former CEO of Fiat/Chrysler, played a significant role in the company’s revival in the 90s. Besides being a great manager, Sergio Marchionne has always had a great sense of humor. After the launch of the Fiat 500e electric car (better known as the “cincoecento electrico”) Sergio went public and asked, “Please don’t buy our cincoecento!”.
A few months earlier the Fiat 500e had been launched with much pomp and circumstance, consuming many millions of Euros with the promise of being the great European competitor of Tesla and with the advantage of being extremely economical. The product launch experienced many delays, and when it was finally ready, only a few units were sold. Studies showed that the loss for each unit sold was 20,000 euros!
Undoubtedly, understanding costs and establishing strategies to control them are significant challenges in company management. And this cannot be overcome if we do not have a clear ability to make the best decisions, with well-defined methods, processes, and appropriate methodologies for the significant challenges that lie ahead.
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Cost reduction can be challenging, but it is often an inevitable process given the competitiveness of globalized markets. No matter how good a business or product is, no company is immune to crises or periods when demand is not exactly as expected.
To avoid mistakes in this very sensitive moment in business management, in this article we will look at five fatal mistakes in the process of cost reduction.
If the expenses with personnel are suffocating your finances in a moment of crisis, know that the dismissal of part of the staff can be disastrous for your company. In the short term, this attitude generates the discontent of those who stay on and the distrust that they could be next.
Additionally, expenses with severance pay can worsen your company’s finances, creating cascading problems by decreasing production capacity. If the intention is to get out of the crisis, you will need staff ready to work.
And rehiring after realizing that the dismissal was a mistake can significantly increase your costs. According to data from Gallup Consulting, replacing an employee can cost twice as much as keeping him.
In other words, layoffs are generally not a good way to cut costs, and you must analyze this alternative carefully before choosing it.
As sales decline, the first impulse is to cut back on advertising. Don’t give in to this impulse, because marketing is the main responsible for bringing new customers into a business, and you will need them.
Don’t think like your competitors: advertise not only your main products in the search for new customers, but keep your brand always present in the media, showing that your business was either little affected or not yet affected by the bad winds of the financial crisis.
The quality of the coffee served to employees and customers, the quality of the napkins, the plastic cups, and even the toilet paper is probably something that can be reviewed. However, it is not advisable to waste management’s precious time on expenses of minor importance and materiality for the business.
Besides generating great dissatisfaction from employees and customers, this attitude will not bring significant savings, spending management time that could be applied in other more important points.
Cost reduction can be achieved by saving money by not spending at one point, but also by reviewing processes throughout the company. If this has been an old plan, it is time to review all operational spheres.
Call managers and supervisors to discuss what can be reviewed or restructured. Everything can be reviewed from production processes, administrative processes, and even customer service, bringing more quality and less financial expenses to the company. In this scope, it is very important to pay attention to the indirect costs generated by each activity, because these often go unnoticed and can bring valuable opportunities for cost reduction.
If the idea is to try to maintain sales levels and get your brand seen more by your current customers and potential customers, quality has to be maintained. Sometimes small cost reductions will lead to very large decreases in the quality of the final product or service.
Therefore, analyze deeply your production expenses and the possibility of reducing them, because if there is one thing that cannot be changed when the demand for a market decreases, it is the quality of the product or service that you offer.
Cost reduction without Mystery
Cost reduction must be constantly analyzed by managers, and in periods of crisis the need for it becomes more latent. However, it is necessary to evaluate the feasibility and impacts of cost review actions, because they can bring more harm than financial breath to your organization.
Check out 8 tips to reduce costs efficiently!
To ensure that cutting business costs brings positive results, it is essential to have a good understanding of the sources of costs and how they relate to the organization’s activities and revenues. This can be a challenging analysis, so MyABCM is specifically designed to help organizations visualize and control their costs efficiently.
Learn how it can help you! Fill out the form below:
In times of crisis, it’s natural for companies to seek to reduce costs to guarantee the solidity of their ventures. However, many businessmen don’t know how to identify the expenses that can be cut.
This article will offer you a few tips on how to reduce your company’s costs. Take a look!
Reducing costs: study your numbers
It’s natural for a company to pay attention to external numbers, such as market indicators or growth projections, for example. However, the greatest source of information for business decision making comes from your company itself.
That’s why it’s very important to have access to indicators — for a wide variety of departments and processes — which are organized and available.
In this way, you can safely make important decisions such as whether to discontinue a product.
Evaluate the quality of your processes
Your final product is the sum of various forms of effort called processes. Guaranteeing that they’re efficient can increase your company’s profit — without having to attract another client.
In turbulent times, poorly designed processes can suck precious resources from your company. Evaluate how much each of your processes costs and whether it’s aligned with your organization’s goals.
Calculating the return on investment (ROI) for a process can help measure its results.
Talk with your suppliers
One way of economizing without affecting your company’s strategy is renegotiating the value of your next purchases with your suppliers or searching for new partners.
In the same way that consumers favor promotions when it’s time to go shopping at the supermarket, companies need to opt for strategic partnerships during times of recession.
However, be careful not to put the quality of your final product at risk. Select companies that offer the same level of quality as your customers will expect.
Avoid waste
When we talk about waste in business, we’re not just talking about electricity and water which frequently draw our attention. Any resource that’s used inefficiently can be considered a loss.
Your company should ask itself: how can we produce in the same manner but spend less?
No expense should be underestimated. After all, it’s obvious how small savings can make a difference over a long period of time.
Train your employees
Before resorting to the easiest way of reducing costs (laying off workers), question yourself about the productivity of your team — or the lack thereof.
Low productivity and high indices or rework drag down your business’s activity, but they may be the result of errors in the training of your employees, for example. That’s why you should find out how to make your team more efficient, because using strategies with pauses for feedback can correct errors and increase your team’s productivity.
Remember that economic crises are cyclical and strategies to reduce costs taken during these times can benefit your company in the future, making it more competitive and guaranteeing it access to new markets.
None of these measures should be viewed in a negative fashion. They’re simply common reorganization necessities in the business world.
What’s important is that your company has access to internal data to make decisions in the correct manner. This is why you should invest in technologies that can improve your company’s management.
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