Business recovery: Cost control and reduction
In the midst of a crisis, operating cost control strategies are imperative.
In this latest article discussing the Seven C’s of business recovery, Neil Hughes, Managing Partner at Baker Tilly in Ireland, looks at why, in the midst of a crisis, operating cost control strategies is imperative.
How can business owners and managers manage costs in a way that doesn’t jeopardise the business in the long run?
“By monitoring and reducing your company’s outflows in order to compensate for a decrease in inward revenue, which most people experience during a crisis,” explains Hughes.
“Remember, it is a lack of cash that causes most businesses to fail, not a lack of profits. A collapse in sales means a collapse in revenue. And if your business has less access to credit, then cost reduction is necessary.”
Fixed and variable
Business owners and managers must understand the nature of costs, and where the money is going in their businesses. The costs in your business can be broken down into two variables: fixed and variable.
Fixed costs – those that are largely unrelated to the amount of sales or production – remain the same no matter what level of business activity is undertaken and include rents, rates, administration payroll and professional fees.
These costs can change over time, although their increase or decrease is not directly connected to the turnover of the business, ie the change may simply reflect a price fluctuation in a particular industry, for example an adjustment due to restructuring, discounts received, etc.
Variable costs – directly related to sales and production – increase or decrease as a direct result of an increase or decrease in sales or production.
“It is impossible to align costs with a cost-saving strategy, without an understanding of what makes up the costs and expenses of your most up-to-date profit and loss account,” says Hughes. “Examine each and every line item before finding ways to reduce expenditure.”
When times are tough, it can be easy to plough straight in, trying to cut costs and restructure staff, says Tracy Hickman, Director of Corporate Advisory Services at Baker Tilly Staples Rodway in New Zealand.
“These are difficult decisions at the best of times but, when under intense pressure, it is even more important to base your strategies on good information,” says Hickman.
“Take time to assess your current situation. How tight is cash? How do your forecasts look? If you operate in construction or services, pull together a sales summary showing current jobs, confirmed jobs that are likely to go ahead, and any tenders/proposed jobs. Consider what expenses are necessary and any commitments that can’t be avoided such as equipment purchases. If your supply chain is disrupted, identify sources, and adjust project schedules and contracts accordingly. Use the information that you have gathered to prepare a cash flow forecast for the best, base and worst case scenarios.”
“No one is immune to COVID-19’s impact and business owners are scrambling to evaluate all available options. Despite years of prudent budgeting and cost optimisation, companies are now faced with the daunting task of finding creative ways to shore up liquidity.” – Alex Swanston, Baker Tilly United States
Implementing cost-saving strategies will pay a significant role in the turnaround of your business.
Hughes invites businesses to consider these main principles of cost-management:
Armed with an enhanced clarity of purpose, you must determine realistic budgeted costs based on your knowledge and experience of how this crisis has specifically affected your business. Go through your business’s operating costs line-by-line and ask: Where is the business spending its money? Are there costs that can be cut back or eliminated quickly?
The prices of raw materials and essential services are often negotiable, especially during a downturn. Consider switching to cheaper suppliers or negotiating reductions on your current contracts.
Forming good relationships with your suppliers is important. While renegotiating fixed contracts can be difficult, demonstrate to your supplier that you can be their steady customer during tough times given the right reductions or lowest rates.
Are there certain services that you’re outsourcing that someone in-house could do? Perhaps you’re paying for goods or services that could be provided easily at a cheaper cost internally?
Ensure that you are fully utilising the skills sets and time of your current employees by reviewing your supplier list and determining what activities can be carried out in-house.
Pay attention to the numbers. Examining every piece of expenditure will give your business a fighting chance of beating the crisis. Be smart in your cost-cutting and never compromise on standards.
The article “Business Recovery: Cost Control and Reduction” was first published on www.bakertilly.ie on 17 August 2020 and has been reproduced with the approval of the author.
The article “Strategies to Survive a Downturn” was first published on www.bakertillysr.nz on 23 June 2020 and has been reproduced with the approval of the author.
The article “Surviving COVID-19: ideas for unlocking hidden cash” was first published on www.bakertilly.com on 25 June 2020 and has been reproduced with the approval of the author.