Many companies are in a vulnerable situation and need to review their costs. Regardless of whether or not your company has been affected by the coronavirus, it’s always important to have an overview and control over your costs and, not least, to know how you can effectively reduce them to improve your company’s liquidity and profits.
Do you need to make any strategic or tactical cost reductions? Here are some valuable tips on how you can successfully reduce your business costs.
As part of the process of reducing costs, it’s essential to look at what can be streamlined and what can be discontinued. The opportunities for streamlining discussed the most by major companies are automation and digitisation. And in recent years the emphasis on cost savings has been given a different dimension compared with previous years – quite simply it’s been essential.
We usually break down cost savings into strategic and tactical savings. Strategic cuts are the most significant and often need to be anchored throughout the organisation. They may involve the way the business is run, centralisation or outsourcing, for example. Tactical cost reductions can be changes to processes, guidelines or procurement routines.
In the past it was common to set a target of cutting costs by 5 to 20 per cent, but current trends indicate that this is not enough. Now we have customers that aim to cut costs by 80 per cent(!).
Here are my best tips for successful cost cutting
- Set a target. One-quarter of companies that carry out cost cutting have no target, which increases the risk of failure. In fact, a conservative target also results in low fulfilment.
- Create and stick to a budget – that’s often the key to good cost control.
- Cost reductions are not something you do once a year; rather, they’re a dynamic, systematic process that continues over a longer period.
- Do you want to cut costs at the same level as everyone else (just under 10 per cent) – or set more demanding targets?
… and here are some reasons why targets aren’t achieved:
- Costs increase in proportion to the savings.
- There is a lack of understanding in the organisation and therefore a reduced effect or regression.
- There is a lack of understanding of what lies behind the costs.
- The project plan is inadequate.
- The implementation strategy is too weak.
Four steps to tactical cost savings
- Analysis – conduct a review before starting to reduce costs.
- Review your budget and costs.
- Implement the cuts.
- Conduct follow-up and control.
Before starting to reduce costs, it’s important to be aware that costs do not normally crop up by themselves. There is usually a link between activities and costs. If a cost reduction will affect activities to a great degree, you should analyse whether or not the company’s activities are actually profitable.
Most companies have a mixture of profitable and less profitable projects. Then it’s only natural to look at whether your company should cut down on one of the goods or services it delivers so that you can deliver goods and services that provide the best possible profitability.
Reduce costs when you can
Cost savings often require a lot of resources. At the same time, it’s important to think about what the best solution is for the business in the long run. There are plenty of examples of companies that have spent money in the good times, without thinking that the future might not be a bed of roses!
With this in mind, I’ll finish by saying: reduce cost when you CAN – not when you HAVE TO.
Do you need help getting started with cost savings? Don’t delay – contact us straight away