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.
1. Laying off staff to reduce costs
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.
2. Decreasing your advertising spending
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.
3. Reducing insignificant costs
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.
4. Don’t revise operational processes
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.
5. Sacrifice the quality of your products and services
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.
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.
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Keeping your company’s costs down is a great advantage in business. However, in a volatile and competitive market, it is not always easy to answer the question, “how to control and reduce costs?”
Controlling your costs has become a priority as important as increasing your company’s revenues. This is why performing an internal evaluation of expenses and understanding how your processes function is the best path to identifying unnecessary costs and establishing an efficient program that will offer sustained benefits for your business.
However, it is up to entrepreneurs to find the best strategies to reduce costs and streamline business management processes. And that reduction means getting more flexibility to take advantage of market opportunities.
Thus, it’s essential to make investments and reap the benefits of this endeavor. However, we do recognize that reducing expenses is a big challenge, which is why we’ve selected a few tips to help you on your way. Take a look!
1. Measure your costs
Before you create an action plan to reduce your costs, you need to make an evaluation of your company’s expenses. Once you’ve collected this data, make a detailed analysis of your expenses from the most relevant (or the largest) to the least relevant. This analysis will allow you to identify many “hidden” costs that are certainly affecting your company’s results.
Knowing every expense is essential to coming up with possible solutions. Besides, by going through this exercise, you’ll be able to measure your main expenses and identify those that are unnecessary, or in other words, those that don’t add value to your company. Remember that it’s impossible to manage what you haven’t measured.
2. Make short-term, medium-term and long-term analyses
To take assertive control of your expenses and reduce costs, it’s important to visualize your reductions over the short-term, the medium-term and the long-term. To do this, evaluate alternatives that will reduce your costs over a longer timeframe. That way, your company will not risk basing its results only on the short-term, which won’t last very long. A study conducted by McKinsey shows that only 10% of cost reduction projects were successful 3 years after their implementation.
3. Improve process management
Evaluating only ledger accounts or cost centers is not enough to identify potential bottlenecks and problems in your company’s processes. Therefore, when thinking about processes, many activities are revealed – such as rework, duplication, or processes and actions carried out with low value for the company and its customers.
The problem is that many companies have difficulty mapping and understanding all the processes involved in the production of their products or services. Completing this task takes time and requires the business to commit to evaluating the enterprise.
It is important to define what are the outcomes or products delivered at the output of each process, its components, suppliers and limits. Since controlling and reducing costs are tasks that require information, you need to pay attention to internal processes.
4. Renegotiate or rethink contracts
Negotiating with creditors can be a viable alternative to controlling and reducing costs. Therefore, make agreements with suppliers and negotiate the best payment terms so that they can be realized without major financial consequences.
In addition to this, rethinking contracts and researching the market to find out what’s available from other suppliers is a strategy that can also offer large savings for your business.
So, improve your purchasing sector. That way, this department will be able to find trade partners that help boost your business but also do not represent unfeasible investments.
As controlling and reducing costs may cause the company to switch suppliers, this possible change has to occur with the right planning. This prevents this exchange from harming the company’s workflow or the quality of what is offered to the customer.
5. Automate cost management
Enterprise Resource Planning (ERPs) is a solution that enables enterprise-wide data integration. However, they do not offer all the subsidies for efficient cost management, especially when we want to understand the impact of indirect costs on various products and services.
The tool is also not able to simply model profitability analyses per customers, channels or regions, which is so critical nowadays. Faced with this demand, companies (such as MyABCM) offer advanced tools for cost, profitability and performance management through software designed specifically for this purpose.
Reducing company costs is the best decision, especially in a market that’s this volatile and selective. This decision requires investment in appropriate technology. And just the desire to accomplish it is not enough if the company does not have the right tools for this mission.
6. Outsource services
There is no reason for a business to absorb hiring and payroll-related costs from non-priority sectors. Therefore, when working with outsourced labor, the company gains efficiency, as it hires a partner specialized in that market to serve it.
In addition, there is more freedom to demand results and compliance with what was agreed in the contract. The business can also take advantage of talent of their managers and Human Resources professionals in the management and training of employees who are essential to the brand’s target activity.
Because controlling and reducing costs requires efficiency, outsourcing is a perfect alternative to achieving better financial results without disrupting internal activities.
7. Invest in professional training
While this topic sounds more like an investment than a cost-cutting action, keep in mind that rework can negatively impact the results of a business. Therefore, ensure that your employees receive appropriate training after hiring and that they are able to perform their duties.
In addition, if you identify failures, turn them into learning, using them as cases in internal training. That way, the company will be able to understand how to control and reduce costs through strategies that keep their staff motivated and feeling valued.
After all, educating a professional – making their performance better – can be more beneficial to an enterprise than trying to hire someone who already has certain professional qualities.
8. Fight unnecessary costs
Technological advancement can also be used to fight against waste, from the simplest, such as resource consumption, to the most complex, such as improperly performed activities.
Unnecessary costs are associated with a company’s lack of knowledge of what is most modern in its market, and what could be used to make it more efficient.
As we have seen, answering the question “how to control and reduce costs?” requires managers to be willing to assess their companies with a careful eye, examining the details without fear of having to admit that certain strategies did not bring the expected results.
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The current economic situation has caused companies to reinvent themselves, changing the way they act in the market, and has also led them to try to reduce their operational costs. Reducing costs is the simplest decision to make when your goal is to leverage your gains and differentiate your company in the market.
There are various ways to lower your company’s costs, ranging from improving tasks and reducing material waste to the feared large scale layoffs.
These days there are new innovative and efficient ways to reduce costs that guarantee great results for the companies that adopt them. That’s why we’ve selected the 4 best trends when the subject is reducing costs. Check them out!
1. Use cloud computing
Cloud computing is one of the most recent market technologies. Storing your information in a cloud can be integrated with your company’s most varied processes and operations, making your data exchanges faster and significantly more efficient.
Besides a considerable reduction in server and maintenance expenses, this storage technology enables you to centralize repairs – you don’t have to manage various computers and servers spread throughout your organization.
2. Give preference to local suppliers
Importing machines, equipment or materials increases your company’s costs in terms of taxes, fees and transport, among other things. There’s an easy way to avoid all of the expenses related to importing: use suppliers within your own country.
Finding domestic companies that meet your needs is a trend that has become more common due to the high value of the dollar. Buying equipment and materials from Brazilian companies will save your business thousands of reais by the end of the year. That’s the reason why you should search the market thoroughly for suppliers that can meet your demands.
3. Work with lower levels of inventory
One of the fundamental tenets of business administration states that inventory is money that isn’t doing anything – and it means less available cashflow. In addition to this, working with large levels of inventory results in various costs for your company such as the hiring of more workers, the need for a larger physical space, the acquisition of special storage closets and compartments to store your products – as well as the administration of your storage space itself.
Thus, a great way to reduce the costs of managing your business is to work with lower levels of inventory. In doing this, don’t stop trying to be more efficient in your tasks and services, because this allows your inventory to be as small as possible leaving just the amount required for your company’s operation.
4. Training employees
Having a well trained professional team, besides increasing the quality of your products and services, allows you to achieve great reductions in operational costs. This is why training your employees is fundamental for every company that wants to differentiate itself in the market.
It’s important to remember that trained employees can easily resolve everyday problems and are of great help in improving tasks and reducing small losses.
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The crisis that has afflicted this country’s economy has affected the profits of many companies. In such an uncertain scenario, good managers need to reevaluate their businesses and seek to survive this time of turbulence while maintaining their company’s health.
Increasing profits by reducing costs is essential to this process. However, it needs to be done in a planned and organized fashion.
Reducing costs doesn’t simply mean cutting spending in a haphazard manner. You need to understand the nature of each cost and its relationship to your company’s sales and profits.
Thus, we’ve written this post to offer tips on how to cut costs in an intelligent manner and also increase your business’s profits. Read on!
Identify all your costs and expenses for at least the last six months. After careful analysis, establish reduction goals for each item. This is known as cost forecasting, and should be done monthly.
In addition, you should keep track of costs regularly, comparing your forecast with what was effectively spent month by month, verifying if your goal is being achieved. If it isn’t, you should analyze what could be impeding the realization of your goals.
Be careful with false impressions
A large sales volume doesn’t necessarily mean large profits. Often increased sales give an image of prosperity, while behind the scenes expenses are consuming all the profits.
To get real results, spending has to be used in an efficient manner. This can be achieved by increasing your average ticket (the customer’s average purchase), optimizing the ROI (return on investment) of your campaigns, and improving your procedures and internal methods.
Analyze your costs in percentage terms
In analyzing your costs, use percentages instead of quantities of money. It’s good to do this because if your sales increase but a cost remains constant, this cost now represents a smaller percentage of your sales volume. And when you diminish your cost percentage, you’re increasing your profits.
On the other hand, if your sales volume remains constant, you can increase profits by reducing the cost of a specific item. This way you can strive for two goals: diminishing specific expenses and increasing productivity at the same time.
Use a reliable system
Before you determine whether a cut in spending will increase your company’s profits, you need reliable information about your operations. This data can be obtained from a system which offers strategic management of your company’s costs, profitability and performance and is integrated with your company’s existing systems.
With this solution, you’ll have access to basic and complex graphic analyses, and the ability to execute advanced simulations for possible economic scenarios. This is important in preparing monthly reports, budgets and evaluations of your operations.
Did you like our tips? Are you ready to reevaluate your business and reduce costs? Leave a comment and share with us the difficulties you have confronted in managing your company’s costs.
Economizing can be the best solution to guarantee a strong cash flow and keep your business competitive. The problem is that frequently managers don’t know where to begin, since there doesn’t seem to be much fat to eliminate from their expenses.
With this in mind, we’re offering a few simple tips to reduce costs which can make all the difference for your company. Check them out!
1. Optimize production
It’s always possible to improve some production process – and you don’t have to sacrifice the quality of your products or services to do this. Start by looking at your consumption of water, energy and telecommunications services.
Beyond this, study the whole production process and soon you’ll discover points where waste is occurring, whether it’s in terms of time, materials or labor. With all of this information in hand, prepare a strategic plan for improvements and in a short time you’ll have a more optimized production process with lower costs.
2. Stock control
Stock can be one of the most wasteful areas in a company, since poor purchases can immobilize financial resources for a long time. To achieve greater cost reductions, plan your purchases so that they include products that have higher turnover during periods of great demand.
Through purchase and sales reports, it’s possible to make projections of what to order, in what quantity and when. Doing this will give your products and services greater turnover, increasing cash flow and reducing unnecessary purchases.
3. Negotiate with suppliers
Review your buying contracts with suppliers of products and services and analyze the conditions for delivery, payment plans and minimum buying volumes required, etc.
Survey other suppliers to find the best opportunities and, if you wish to continue with your current suppliers, renegotiate with them based on the information you’ve gathered from the competition. You’ll probably be surprised by the new parameters that you’ll be able to establish in exchange for fidelity, and your business will achieve a great reduction in costs.
4. Control your cash flow
Using your reports again, examine your expense accounts and analyze each expense to identify how to reduce them or eliminate them entirely. Then make a forecast of future revenues and expenses to align your cash flow with programmed purchases.
For example: program your purchases to be paid always on the same dates when forecasts indicate that you’ll have money from sales coming in. With these techniques, along with reducing your costs, you’ll always guarantee a positive cash flow.
5. Automate your company
Many companies still use manual processes, requiring large amounts of rework due to human error, wasted time due to tasks that could be automated, reports with unreliable data, an excess of printing costs and a large quantity of wasted raw materials in the production process. The solution for all of this is to automate your business using strategic and operational management software (systems) which, along with contributing to cost reductions, should improve the overall performance of your business.
Maintaining your costs under control is what sustains the survival of companies in competitive markets and putting these tips into practice can increase your company’s competitive force, leading to sustained growth.
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