Ahead of the Next Year and the Years 4: Cost Reduction Strategies During the Planning Process

One of the fundamental things that should not be ignored when preparing a financial plan is cost. Costs determine the financial performance of the business and can pose a risk to profitability and sustainability if not managed correctly.

Every company wants to reduce costs for more profitability. There are two types of cost: Fixed Costs and Variable Costs. Fixed costs are those costs that remain the same even if the level of activity of a business or project and the amount of production changes. Fixed costs usually refer to periodic or long-term fixed costs and are not directly related to the quantity of production. Variable costs are costs that change according to changes in the production or service volume of the enterprise. As the amount of production increases, variable costs increase and as the amount of production decreases, variable costs decrease. Today, cost reduction strategies have become very important for a company to achieve sustainable profitability. Different strategies can be used for different types of costs. Here are some common cost reduction strategies by type:

Fixed Costs

1-Proper Planning & Reporting:

By creating a financial model that assumes a 20% drop in revenue, you can see how this affects cash and make decisions accordingly. So, financial plans that include scenario and sensitivity analysis are inevitable starting kits to identify the root map of the cost reduction strategy.

2-Treasury:

Companies should minimize the losses incurred by not properly managing cash. This can be considered a variable cost for some companies. You can re-negotiate key vendor contracts to set higher payment terms and re-structuring key customer contracts with incentives for early payments. If you have some extra funds & aren't concerned about needing those funds over the next 30-90 days, you can save money by evaluating the various discounts vendors are willing to give for early payment.

If you pay bills as soon as they are received and there is no discount for paying early, look at the cash flow to decide when to pay the bill. If cash is very tight, prioritize bills based on need and the lowest late payment penalties.

3-Headcount:

Before hiring someone, you need to make sure the headcount is actually required. If you see headcount cost as a percentage of revenue continue to rise over time to where it continues to take up more of the revenue, then it could be a sign to slow the pace of hiring.

Sometimes having more people working remotely can also reduce costs. You may consider embracing remote work options, which can reduce the need for large office spaces and associated costs.

4-Outsourcing/Consulting Fees:

Instead of hiring full-time employees, consider outsourcing certain tasks or projects to freelancers or third-party companies. This can reduce the burden of employee-related fixed costs.

If you're paying consultants for branding or social media assistance, it's wise to consider these services as a luxury rather than essential. At the same time, while working with a recruiter for any hiring process, you can consider negotiating with them to handle upcoming roles.

5-Energy Efficiency:

You can implement and monitor energy-saving measures like using energy-efficient lighting, appliances, and HVAC systems to lower utility bills.

6-Technology Optimization:

There may be software that is not being used and needs to be cut off. You may evaluate software and technology subscriptions to identify redundant or underutilized services that can be canceled or downsized. Without spend management, many companies end up with duplicate software subscriptions- different companies that provide the same service. Canceling one of them will both save money and keep the team more organized and efficient Also, options for flexible monthly contracts at the same fee to keep up with changing needs and budgets. This can be considered a variable cost for some companies.

7- Renting vs. Buying:

Consider renting equipment or assets instead of purchasing them outright to avoid upfront costs and ongoing maintenance expenses.

8-Corporate/Credit Card:

Strategically using the right corporate card for business-critical expenses is one of the best ways to reduce costs for your organization. You can potentially earn significant cashback on expenses, which goes straight to your bottom line.

Small businesses can use credit card reward points to pay for business trips. In that way, you can reduce travel costs.

9-Equipment Sharing:

Share equipment and resources with other businesses to lower the costs of maintaining and updating them.

Variable Costs

1-Demand Forecasting:

By boosting accurate demand predictions, businesses can curb unessential spending caused by production surpluses or shortages.

2-Material Substitution:

Innovative choices concerning materials or ingredients that are more cost-effective can lead to significant savings while maintaining quality standards.

3-Lean Manufacturing/Operations:

You may implement lean principles to optimize production and operational processes, reducing waste and increasing efficiency. Monitoring inventory stock closely helps prevent unnecessary accumulation of needed funds & maximize efficiency.

4-Process Automation:

Implementing automation can be beneficial where feasible to streamline processes and reduce the need for manual labor.

5-Quality Control:

You can improve product and service quality to reduce returns, customer complaints, and rework expenses.

6-Sales and Marketing:

Search Engine Optimization (SEO) is very important for targeting new businesses.

However, you should take a look at how much you've spent on sales divided by the number of new customers you've acquired in a certain period. It may be a show that some inefficiency has crept in.

Marketing spending's history or market conditions should be examined well if it is to be done for the first time because it's a key spending area for most start-ups and established companies. You should focus on efficiency and set a target return on investment and cut back on less effective ones.

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