5 Cost Reduction Strategies for Businesses

Did you know as per Gartner only 11% of organizations can sustain cost cuts over for more than 18 months period. This is because most cost-cutting strategies are short-term and fail to make the behavioral change required for smart spending decisions in the future.

Now everyone company wants to increase the Bottom line which is net take money at Home.

This can be done either by Increasing a revenue multiple times with not so multiple time cost increase Or with identifying opportunity to save cost.

So today in this blog we are going to talk about most effective ways to identify cost saving opportunities in your company.  

Identify Cost Drivers

Think of cost saving activity as a long term goal and not a temporary measure and identity various cost drivers. Cost drivers are the specific elements that impact the cost of running your business. We’re talking about anything from raw material costs to admins cost, and even regulatory compliance cost.

Now every product or service you offer will have their cost drivers for e.g., suppose you are manufacturing toys so cost of raw material, Labour, packaging etc. will be your cost driver and in case you are service based agency then providing marketing consultancy then cost of employees, digital marketing cost will be your cost driver

Once you have identified all the cost driver with your revenue line now you should understand what this cost are and why they are being incurred. Just understand the nature.

Consider all factors like how many hours it takes to produce goods, no’s of manual Labour hrs., electricity cost. Once you deep dive into all the cost parameters that’s where you will find an inefficiency and areas of saving cost.

Here’s how I will work, when I am assigned opportunities to reduce the cost.

I will dig into monthly cost analysis, deep dive on all cost factor, performance metrics etc.

I will be observing various trends and correlations that could reflect the cost driver for the company. For instance, does the cost of a production increase when total production volume goes up of the company? If the cost increases then it means the process is not efficient and additional cost is being incurred for additional production

Which product has better margin and why ? Why are some processes slower than others?

So question to all the department and identify all the bottlenecks which are leading to increased cost or expenses..

Identify Positive Cost and Negative Cost

Do you think all cost are bad for the organization? Well, no there are few costs which are good for your org. It is important to identify this cost.

Positive Cost are cost which will lead to good return on the investment, suppose you spend money on google ads and it generated 8x of the revenue from the cost, then it is good cost which is increasing the topline.  Positive cost will drive your business upwards.

On the other hand, negative cost will drag your profit down, like expenses on project management tool which nobody is using or software which is outdated and not providing accurate results etc.

So the trick to do this make a list of expenses and categories them in good and bad bucket and Strat trimming the bad expenses.

Talk to Suppliers / Vendors

Another great strategy to have indirect savings will be speaking to your Vendors and Suppliers. There are 2 things you can do here.

Speak to your Suppliers and ask them if they can reduce the cost of product / service offered, if you pay them in advance or get some favorable option for you

Try to negotiate with them for better credit terms (if current credit term if 15 days negotiate for 30/45 days) this will help you to better manage your cashflow and you can park surplus funds in liquid investment options.

Budgeting

One more way to put a check on the cost of the company would be having system of budget in place. Budgeting is such an important tool for any organization. Company should have 1 year budget and same should be communicated to all the budget heads or departments. Budget will help to identifying potential areas of overspending and allow for adjustments to be made before it's too late. Budget Vs Actual analysis on monthly basis will keep things on check and will ensure that all department heads and employees are aware of the expenses they can make.  

For e.g. if the travel budget for the month is 50k and team has already spent the same, now they should see what measure they can take, like video meetings, avoiding trips unless required.

Automation

This is most crucial and important areas where we as business owner often ignore and keep following up old practice and old processes. By doing things manually. Company should identify all the areas which are manual driven time-consuming tasks, where you can significantly cut labor costs and bring efficiency in the process. From manual accounting to customer call options, identify areas which can be automated. Pls note there is one time cost of bringing automation, post that system are in place and effectively you will end up saving lot of money.

Well there is one more bonus point which is outsourcing non core areas like accounting, HR activities which can be cost effective options as a company.

That brings end to this blog.

Remember this, it is not about slashing expenses left right and center, it is about understanding the impact of cost reduction and urgency of actions. Decision taken with right data set and right approach will lead to long terms gains.