Businesses are looking for new ways of increasing profit margins and maintaining their market share. The most practical way is to undertake an effective cost-reduction exercise that will ensure quality of products and service delivery and retain customers.
Most business owners would be worried that cutting down cost might affect the quality of products and services, but probably if you would scan the cost of doing business you would discover you may be spending more but getting less result.
You may seem to be doing very well now in terms of cost management, but critical examination of cost periodically will lead to discovery of areas where you can significantly reduce cost. Cost reduction is not new in business. It is an exercise that we undertake every day in various organisations. Any time we can decide to improve the bottom line of our business: we are talking about a cost reduction exercise.
The business dictionary defines cost reduction as “The process of looking for, finding and removing unwarranted expenses from a business to increase profits without having a negative impact on product qualityâ€Â.
Many business managers will engage in periodic cost reduction drives in order to make their company's operation more efficient and to boost profits. The bottom line of this all important exercise is to improve profit for the business without compromising quality.
The current state of our economy demands, as a matter of urgency, that businesses explore where they are overspending and introduce measures to cut any unwarranted business expenses. Small businesses face a unique challenge due to lack of economy of scale.
What giant business organisations can afford to let go, they cannot. To survive the current economic downturn characterised by daily cost “upsurge†in almost all the elements of cost of production and service delivery, you must determine where you need to spend most and where you can cut. The following areas when critically scanned can yield a positive result in reducing cost and boosting profits
Check your Energy consumption: no business can avoid consumption of power in doing business. As the cost of electricity, fuel, petroleum liquid gas go up this will automatically be translated into high cost of production, service delivery and high market price. This may weaken your competitive position, especially when there is a cheap substitute to your product from the Far East.
Energy cost savings is not a one-man exercise. Get your employees on board. Encourage your staff to put off their computers if not in use. Minimise time spent in browsing non-productive web sites, minimise brightness of the light on computers, switch of air-conditioners when out of the office for more than 15 minutes. Use only energy-efficient bulbs. Do not put on the standby generator if it will not bring profit.
You should do proper cost and benefit analysis in switching on the generator when the main power goes off. A 150kva gen set should not be switched on to execute jobs that will not be able to provide profit to fuel the generator. Switch off all electrical appliances when not in use. There may be exceptions, though. These little things you do may not seem to register sharply on cost, but when you sum up it will become huge and eventually improve the bottom line.
Efficient use of your investment in information technology: Investment in IT is expected to reduce the cost of doing business, especially in areas of communication and information processing. Experience suggests that most companies take delight in placing computers on their office desk, but do not use them to benefit the organisation.
I have witnessed situations where an institution invests so much in IT infrastructure, provide computers for every member of staff, get the PCs hooked to the Internet with expressed outlook and other modern information processing platforms, and yet invest huge sums in stationery and printing, wasting a lot of paper in the process.
Think about it. You would make savings if you decide to send memos electronically; you would save cost on paper and toner. You would also save electricity, and save time in moving from office to office to let people sign hard-copies of memos.
You can further have electronic meetings, give approval and authorisation electronically. You would save time and save on cost. Do not forget, toner, paper and other items are very expensive now.
Look out and make quality purchases: You need to shop around for good purchase of materials and services. It does not matter how long you have stayed with one major supplier; there may be others who want to enter the market and are prepared to give quality and discount.
Even your major supplier will decide to offer you discount once you make an attempt to switch. Solicit for quotations electronically. Sending people on errands to obtain hard copies of quotation is time-wasting. You waste time and fuel in traffic. You have to shop around for everything you purchase -- from Internet facility, computers, furniture, raw materials, office equipment and even small purchases.
Periodically conduct a business expense audit: This was done in a company (name withheld), and they discovered that travelling expenses alone in a month had cost them US$200,000. Imagine the impact on the bottom line. Doing expense audits will show where a business is spending most and where it has to cut down. It is worth assessing the value each cedi spent brings to the business.
Check labour productivity and labour size: Cost of labour affects profit significantly, in terms of basic pay, allowances, medical care, pensions, provident fund and other benefits in kind. This must be matched with productivity otherwise it only gives negative impact on the bottom line. One professor, years back in a reputable academic institution, lined up his staff one day and began to question them one by one about their role in the organisation and their performance for the past one week.
Surprisingly, not many of them could pinpoint anything they had done in the past one week. What do you describe them as being, free-loaders or excess garbage? They were just paid without any contribution from them to the well-being of the institution. Examine your labour cost in relation to productivity and tactfully ask them to go if they are not needed. Employment is not based on pity-party alliance. Do this within the ambit of the labour law. Each cedi saved in terms of labour cost is an improvement on the bottom line.
Cut down meetings: From board meetings to meeting security men, it is almost always expensive. Sitting allowances, refreshment, fuel allowance and many other perks that go with meetings are a burden on the bottom line of the business. Only necessary meeting must be held. Reduce the number of members and that will also reduce cost. If it is possible, cut off all sitting allowances apart from members external to the organisation.
Monitor request for samples: Not all samples are always used as samples. They may end up somewhere else. Samples are cost to the organisation.
Train your work force: Time and money invested in the equipping staff with the required skills is good investment. Training creates an awareness of what being a Cost-Effective Organization is, and expenses drop even before specific projects are identified. Training will remind workers of the need to be productive and minimise wastage.
Consider your borrowing appetite: Debt, to some extent, helps to fund uniquely identified business opportunity that will improve the bottom line of your business. But excessive borrowings will inevitably put your bottom line under stress. Shop around all the finance houses and see who understands your business and can package a product to meet your needs.
Check your office space: How much are you spending on office accommodation? Has your business grown to that extent? Are you making full use of all the available space? I once advised a company that had changed office accommodation three times in one year.
As they changed the office accommodation, their monthly rental was increasing and the cash flow problems kept multiplying. Finally, when they heeded advice and decided to look for something that matched their size, they saved about US$43,600 per annum in rental charges alone. You can similarly look at the amount spent on the office space and check it against the returns you are making.
In conclusion, every business can improve on its bottom line if they would care to periodically conduct business audits of expenses incurred in meeting their targets. Efficient organisations can become more efficient. Waste of resources can be minimised. Staff can be encouraged to become more productive through training and development. Energy consumption can be minimised. Profit can be improved if you choose to undergo an effective cost reduction exercise.
Where you may think you are saving cost, there may be a source of waste. There is too much waste in organisations. Whether in time, resources, talent, opportunity or any other contribution possible by people or equipment, you will find waste.
The current economic situation is critical. We need to be conscious of the way we use resources. We must judiciously think of the value we can create or waste whenever we take up a pen to write a cheque, or dip our hands in our pocket to buy something. Let us look inwardly at our expenditure pattern.
Expect the conclusion of this subject in subsequent issues.
Writer’s email: [email protected]
By James ABRAH
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