A challenging economy requires careful cash management to sustain your business.
Tough decisions are necessary which tend to involve workforce reduction and increased productivity from existing employees, both crucial to examine. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider –
1. Product lines and customer segments
Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.
2. Outsourcing
Many businesses are gaining significant cost and operational efficiencies from outsourcing non core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction that perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise benefits to your business allowing your team to concentrate on strategy and execution.
A challenging economy requires careful cash management to sustain your business.
3. Inventory
Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies.
4. Suppliers
Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs.
5. Employees
Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.
While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties.
