1. Understand the cost-revenue structure of your business. This is the most important item in effective cost management. Many companies simply do not hold accurate information on what their costs really are. In looking to manage its costs, a company must first identify its sources of revenue. How much is coming in from sales of which products and services? Which are the highest spending customers? Then, the company needs to work out which specific costs are implicated in producing its revenue stream.
2. Reduce interdepartmental conflicts. As a first step, draw up a basic flow chart of your company’s work flow. This will start to help you to understand how each department is effected by the others. For example, how does warehousing effect sales? In any organization, the way one department operates is influenced by other parts of the company. So in order to reduce the complexity, a business owner must be constantly questioning why work is done, and how it can be done more efficiently. Once you have drawn up your flow chart, you will probably start to observe that there are a number of extra and unnecessary steps involved in your company’s operations.
3. Skill your employees and involve them. Educate your employees in decision-making, team-building and problem-solving so they are better able to control their own costs. Most people want to do a good job and to help the company they work for to be successful. When a company invests in its people by training and skilling them up, especially in a recession, it will reap the rewards of a work force who work together for the good of the company. Similarly, if you actively involve your employees in the cost management process, you will get the best out of them. If you are actively on the look out for suggestions from your employees you will, without a doubt, find better and more cost effective ways to do things.
4. Back to your business plan. Every company needs to have a long-term business strategy. Cost management should be part of the strategy and be influenced by the strategy. Cost decisions should be measured against the company’s strategy, rather than a current short-term situation. A company should not buy an excessive amount of inventory because the manufacturer has lowered the price to get rid of it. The company should be buying the amount it needs to satisfy its customers.
5. Easy Savings. I will reiterate that there really is no such thing as a quick save when looking to manage your costs, but there are some simple changes that you can make right away. Some small costs can be reduced with little risk of affecting the quality of your service.
Check supplier invoices carefully for overcharging e.g. missing discounts.Get rid of obvious overcapacity e.g. paying rental on spare telephone lines, unnecessary subscriptions etc.
Put a stop to blatant waste e.g. heating your premises when they are unoccupied. Lights on when not needed.
Only use first class post when it is really necessary and tell your staff to do the same.
Source cheaper suppliers who will still offer you the same level of service and products.
6. Benchmark yourself. As part of your cost management overhaul, benchmark yourself against other similar companies. What is the industry average spend in different areas? And how do your costs compare? Periodically review what you are doing and how you are doing it.
7. Talk to your customers. Take time to talk to your customers and ask them if they think you are providing them with anything they do not need. For example, maybe the expensive same day delivery option you offer is not really required or perhaps your packaging is better than necessary. Your customers are the best people to tell you about which parts of your service are important to them and which are surplus to their requirements.
8. Review your finances. Cut back on working capital through just-in-time purchasing, better credit control and agreeing longer payment terms with your suppliers. Consider low interest loans rather than overdrafts – and knock any unnecessary loans or overdrafts on the head. Apply for any grants or subsidized loans that you may be entitled to. Get the most out of your premises by thinking about sub-letting any extra space. Check out ways to reduce your utility costs and also check out alternative telecoms suppliers.