The easiest way to lift profits is to cut the fat out of costs.
Cost cutting and profit increases can amount to much the same thing if handled correctly. Cost cutting does not necessarily mean the slashing-and-burning of budgets on a 'let's-see-if-this-works' whim, nor does it mean the intense scrutiny of entertainment expenses in August, before reverting to three-hour lunches in December.
But what if a company could save 20 per cent a year on its stationery spend? Or 26 per cent a year on its courier costs? Or 76 per cent annually on its printing bills?
Wouldn't that represent real savings - and an increase on the bottom line?
The truth is that a significant cause of poor business performance in Australian companies is the lack of attention given to the cost of running the business.
The reasons for this lack of attention are many, but here I am going to focus on three of them. The process of cost management and review can be difficult to manage. Tough-minded resolve is usually required, and cost-reduction initiatives are not always positively received by colleagues and staff.
Any executive who chooses to undertake a program of cost-management, then, is probably going to find themselves out on a limb and needing to show true leadership skills. And he or she is going to have to do it in today's business world, when the buyer is often at a disadvantage.
The seller, or supplier, possesses vital market knowledge that the buyer, or company, does not have because of a lack of resources, time, expertise - or a combination of all three. Consequently most, if not all, organisations overspend significantly on their business operating costs.
Experts estimate that 90 per cent of Australian businesses are overspending on day-to-day expenses, by as much as 75 per cent!
How does a company know if it's one of the 90 per cent? Our ERA website (www.expense-reduction.com.au) suggests that if a company can answer 'yes' to any of the following there is a good chance a company can reduce its business operating costs and free up profits:
YES/NO There is no centralised purchasing system. Each department seems to have its favourite suppliers and its own purchasing processes.
YES/NO We always seem to be purchasing in an ad-hoc, as-needs, manner, instead of benefiting from bulk purchases.
YES/NO We seem to stick to the same supplier and trust that they're giving us value for money.
MAJOR AREAS OF COST CONTROL
The main areas where costs can be rationalised include telecommunications, business travel, energy, freight, couriers, mail, office supplies, reprographics and stationery as well as cleaning, merchant card services, maintenance contracts and document storage, but of course the list is endless.
Though when reviewing overhead costs and establishing benchmarks, there are a number of other factors that need to be taken into consideration to achieve long term success in maintaining cost savings. These include improved inventory management and cost-analysis and management tools, better compliance with corporate contracts and the fact that staff remains focussed on strategic tasks. Plus the consideration that new suppliers or options provide exposure to, and the introduction of, new ideas, technologies and trends, to help enhance competitive advantages.
So how does a company implement a plan of effective cost-management? I would suggest the following:
Care about effective cost-management.
If a company's staff is complacent about financial performance and cost control, there is little chance that a cost-saving project will succeed. Executives must find the time to take an interest in reviewing expenses and reducing costs - staff generally mould their behaviour to match that of their leadership.
Cost-cutting should not be allowed to become the 'flavour of the month'
Remain motivated to keep costs in check on a regular basis. If a cost-management 'culture' is not established, employees will quickly allow your 'push' to fade away. It's important to instigate measurable strategies for cost reduction.
Over-confidence can be a killer
Companies that assume their costs are under control based on historical trends, or assume that their market knowledge is watertight run the risk of overspending through arrogance. You know what you're paying, but do you know what your competitors pay for the same products? Never assume that you know the market as well as your suppliers - and never assume that they're doing you the best deal possible.
Compare your cost-management performance to others in your industry and region. "Gather the data from outside agencies, consultants or benchmarking services," says Marfleet. "Be careful that you understand the data as it applies to your situation - data is useless unless it is interpreted correctly."
Understand what you're buying
Determine your product and service requirements. Don't purchase premium services unless absolutely necessary. Sales people will often use bait-and-switch tactics to move you on to their higher margin items. You end up buying unnecessary extras or add-on services such as maintenance agreements. Also watch for relationship-building tactics - do you really want to pay higher prices for the occasional lunch or rugby game?
Talk to your suppliers
Companies that buy the same product and the same quantities year in, year out, are probably paying way too much. Suppliers will price their offerings according to what the market will bear. Having done your research, inform suppliers that you are reviewing your costs, which have to be reduced. Then prepare to negotiate, and to comparison shop.
Stay alert
Monitoring your cost-management strategies is vital. You need to watch that staff members don't slip back into old habits, the supplier charges correct prices, and service matches the agreed specification.
USING CONSULTANTS
Most Australian companies do not have the staff resources to be able to regularly review expenses and reduce costs nor the time to monitor the market place or their suppliers.
So a company might consider using a cost management consultant to expertly manage the situation. The question that executives might ask themselves, however, is whether or not the savings will justify the sometimes substantial fees that may be charged?
The first thing to consider is what a consultant might actually be able to do for a company. For instance, does the consultant have a demonstrated track record of achieving cost reduction and the resources to deal with your size of company.
Then there is the question of the fee and how it will be paid. Arrangements can range from a fee for service to a contingency fee (a fee that is based on results). A consultant who receives their fee entirely from the supplier cannot be assumed to be independent.
Where a contingency fee is charged, it is generally expressed as a percentage of the savings obtained over a period of one year. The usual figure is around 50 per cent, although lower percentages can be found.
Sounds a lot, but remember, from the consultant's viewpoint, they are bearing all the risk in proposing a contingency fee as they are undertaking a lot of work 'up-front' before being entitled to any fee. If no savings are found, then no payment is received.
For instance, these are the steps a consultant might need to undertake where a change of supplier is deemed necessary:
The company's category spend is analysed in detail to form the basis for selecting an appropriate supplier so that that suppliers will fully understand the company's needs. Tender documentation is prepared to ensure that there is full understanding of what is required from suppliers and that they have sufficient information to be able to offer the most favourable rates.
A detailed review of the tenders received is undertaken to ensure the best decision.
The implementation process, which typically takes 6-8 weeks is actively managed.
The bills are checked, once the new supplier is in place, to ensure that the correct rates are being applied, and 'teething' problems are resolved.
Continued reviews over a set period, dependent upon the overhead category, to ensure that the company receives all that it expects from the new arrangement.
Finally, teaching the company to understand movements in rates so that rates can be re-negotiated with the supplier in accordance with general movements in the market.
Fred Marfleet is the Chairman of Expense Reduction Analysts. For more information call 02 9922 7999, email info@expense-reduction.com.au or visit http://www.expense-reduction.com.au
Franchisor expansion policies are not as simple as one might... Read More
Many small businesses do quite well due to the blood,... Read More
If you ask most small business owners what priority CRM... Read More
Under the Securities Act of 1933, any offer to sell... Read More
Take advantage of world politics today and start your own... Read More
The Federal Trade Commission out of the blue decide in... Read More
If an organization lacks a mission statement, it is worthwhile... Read More
Financial Consultants are one of the fastest growing industries today.... Read More
What is a Virtual Assistant?A Virtual Assistant is a person... Read More
Ongoing support for a franchise system is omnipotent. A major... Read More
The start of a new year is a time for... Read More
Buying a franchise is not for everyone. This guide will... Read More
As a practitioner and student of Small Business Marketing, I... Read More
One of the major complaints in the QSR Quick Service-Fast... Read More
It is not surprising that some people may perceive Six... Read More
Owning a business is a challenging endeavor. If you're like... Read More
We all know that competition is an ugly word but... Read More
Every company has business pain, but the pain does not... Read More
The home-based business market, sometimes called the SOHO (small-office/home-office) market,... Read More
Send handwritten notes. That applies whether you're a guy or... Read More
When starting a business, you have to determine the method... Read More
Cleaning the trailers towed by big trucks is not easy,... Read More
Over the years I heard the best way to learn... Read More
Q: I will be retiring this year at age 60... Read More
A successful joint venture marketing effort is the goal of... Read More
What's your job profitability? Do you know?Many business owners are... Read More
No matter how small your small business is, it is... Read More
-- The One Pager Shortcut Series --An effective and compelling... Read More
A common hazard faced by new entrepreneurs is a lack... Read More
Concrete cleaning can be a lucrative business to start. Here... Read More
One of the best marketing strategies a business or organization... Read More
You've probably heard the statistic that 95% of small businesses... Read More
Data. Most people think it is a term relegated to... Read More
What does buying a fat pig have to do with... Read More
Most of us remember going to at least one garage... Read More
Paper Shredding Business Opportunities are blossoming up everywhere because in... Read More
If your home business is not performing the way you... Read More
As small business managers, we juggle limited resources in a... Read More
Do you need grant funding for your nonprofit organization? If... Read More
Home based travel businesses are no longer the wave of... Read More
Now that winter has passed, the annual ritual of spring... Read More
I have to admit, I was curious. When I saw... Read More
If you ask most small business owners what priority CRM... Read More
The key to organizational focus and helping those who need... Read More
Franchising is the fastest way to build small businesses, provide... Read More
What is Business Valuation? The term business valuation is the... Read More
Too often in business we get trapped into reviewing our... Read More
During the 1980 presidential campaign, candidate Ronald Reagan vowed, if... Read More
Consistency is a huge word when operating your business. I... Read More
Many times small businesses want to expand their businesses and... Read More
What is the best time to expand a mobile car... Read More
Anyone who is serious about washing aircraft as a full... Read More
It is essential that you fully understand how the fuel... Read More
Running a business on the net these days can be... Read More
In the world today, many people are further in debt... Read More
Let's face it, we all tend to get stuck in... Read More
If you are just starting your business, or if you... Read More
Cash flow. To stay in business, you've got to keep... Read More
As an entrepreneur you can learn a lot by following... Read More
You make the decision to go into business and for... Read More
Some of the very qualities that attract people to the... Read More
To have one of the popular in home daycare businesses.... Read More
Many of our nations 400,000 franchisees run their businesses out... Read More
Hi, Charles...here, Your Cap and t-shirt guy From Texas. How... Read More
Costs of over regulation and over disclosure end up hurting... Read More
Cash is King?That is what everyone tells us and it... Read More
Small Business |