That Get Your Company Measurable Results
Focusing on selling your products to generate sales is – of course – essential.
And yet, it is at least as important to lighten your cost structure as much as possible. Finding the right balance in cost reduction and smart countercyclical investments is essential to the longevity of your organization. And this is especially true in times of crisis or recession.
In this article, I will walk you through some step-by-step choices you can make today to efficiently, sustainably reduce your costs, save money, and emerge resilient after a financial crisis.
1. Analyzing Your Cost Structure
Divide your cost structure into two categories.
1. Costs directly linked to your products or services (Cost of Goods Sold – COGS)
2. Other costs (including overheads)
Get started by accurately mapping out these costs. Begin by looking at your sales and turnover figures, and compare those against your cost structure. This will reveal which products are your most and least profitable. Your time and energy is precious, and that’s why it’s so important to prioritize your most profitable products. Evaluate this data, reduce the volume of your less profitable products, and transfer your attention to your best sellers.
Cost of Goods Sold
COGS must be kept under control at all times in order to fully safeguard your operating margin. Thorough process efficiency and effective use of manpower are critical here. During a crisis or recession, it is incredibly difficult to prevent these costs from rising. So, to keep your total costs under control, you’ll need to shift your focus to other fixed costs.
During a booming economic period, it’s not uncommon to accumulate a whole collection of nice-to-have services – incurring a constant leak of funds to less-than-crucial costs. Take some time to evaluate which of your costs are actually needed and are actively adding value to your operation. Then, identify which costs are unnecessary. Delete any underutilized subscriptions and memberships. Check to see if any supplies can be reduced. Rent out excess office space to small businesses. Analyze telephone, energy, and insurance contracts and optimize them where possible. Take these quick interventions to reap significant and unexpected savings.
Balance in savings
A first, natural reaction in a difficult period is to aggressively cut fixed and other costs, including cutting labor costs. And yet, in order to emerge strong after an economic crisis, it’s important to strike a balance between necessary savings, and smart countercyclical investments. Be wary of making hasty decisions about laying off employees. I’ll go into detail about how to effectively cut labor costs later.
Difficulties analyzing your cost structure?
2. Increase Process Efficiency
Get started by mapping your value chain. The value chain, as defined by Michael Porter, represents all of your company’s internal activities required to produce your product or service, and deliver value to your customers.
Which processes can you make even more efficient than the competition? What is your competitive advantage? Improve your less efficient processes, and then, delve further into your operational processes to optimize even more.
Production and Operational Processes
Search for bottlenecks in your production and operational processes. Where are you losing time and energy? Are there machines that have a limited capacity, or cause delays? Are there steps in the process that don’t add value to the end result? Sub-optimal business processes have a negative impact on your products’ operating margin, and it’s well worth optimizing these processes to see where you can unlock some value.
According to LEAN management, there are 8 types of process activities that get in the way of providing value for a customer. These unnecessary steps create waste; both waste of time and waste of money. If you’re like most organizations, you’ll find unnecessary waste within your administrative processes. To free your organization of this waste, look for processes you can quickly and cost-effectively digitalize, streamline communication, and optimize access to information sources. Usually, valuable time and money is lost in repeated calls or messages, and while searching for documents.
Structuring, documenting, and standardizing processes can save you money.
What gets measured, gets improved – Peter Drucker
3. Evaluation of suppliers
Take a look at your suppliers in order to ensure each of these relationships is beneficial for your company.
Who are your reliable partners? What cost volume does each supplier represent? Do you only have one supplier (single source) for certain materials you purchase? Analyzing your suppliers helps you to identify where opportunities and threats lie.
Do you buy similar materials or services from multiple suppliers? If so, find out whether you can centralize these products in order to realize economies of scale, and to get volume discounts. Next, find out whether there are alternatives for purchasing your most expensive materials. Also, check to see if you can get large volume products from suppliers offering a better price-quality balance. Identifying alternative suppliers is a powerful way to immediately save money during a crisis.
Communication During Crisis
If your company is in a crisis, speak directly to your suppliers and look for solutions. Sometimes, you can sell an excess stock back to the supplier – albeit at a lower price – immediately releasing additional financial resources. In a crisis period, also check in on your suppliers’ situation. Have they also been affected? Can they still deliver? You may have to look for alternatives, and that’s why it’s so important to have a strategy already mapped out in case of emergency.
4. Optimization of Human Capital
Your employees are your company’s human capital, and that means optimizing the use of working hours is critical.
A suboptimal use of people can be costly. To avoid this unnecessary expense, make sure your company isn’t in any of these three situations:
- Structurally, you have too few employees, so the workload is too high. For a limited period of time, this is feasible, and can even be a healthy way to push your team and stay productive. In the long term though, an excessive shortage of employees is harmful. Team members will not be able to keep up this pace while maintaining quality.
- Structurally, you have too many employees, and there is insufficient work available. Employees start to get bored, lose motivation and focus, and their performance is no longer optimal. This sends your organization into a negative spiral.
- You have enough employees, but these employees don’t align with the values and skills your organization needs. You have sufficient people, but not in the right place. This leads to suboptimal performance and poor results. To solve this dilemma, put your team members into positions in which they excel. This will keep your team motivated, productive, and high performing.
Considering Dismissal in Times of Crisis
As mentioned earlier, many companies’ first response during a crisis is to dismiss staff in order to save costs. But this decision can’t be taken lightly. In some circumstances, layoffs can have a negative effect. Take time to make a thorough analysis of your business situation, lay out a clear plan for the future, and then determine which employees fit into that plan.
It’s incredibly important to make smart, thoughtful decisions in a period of financial crisis. On one hand, letting too many – or the wrong people – go can make it even more difficult to get out of the crisis. On the other hand, letting too few people go can make it much harder to get out of the crisis, causing you to fall behind your competitors.
Taking these 4, straightforward steps will help you effectively cut costs, save money, and emerge stronger than ever after a financial crisis.
Want to efficiently reduce your costs in the short term? Book your free, 45-minute strategy session today!