10 points to keep in mind while working on the Cost Reduction Program !

In these turbulent times, most of the organizations, individuals who head a division/unit are faced with the challenge of maintaining the profitability growth of their division/unit. Profitability can be increased either by increasing the revenue or by reducing the expenses. I am not suggesting the areas where the cost can be cut / reduced. but sharing thoughts on how to go about the cost reduction program.

No one is interested in reducing / cutting the cost, as long as the profitability is there. Once they see their revenue is not going up, then everyone will look at improving their bottom-line (profit). The popular way is to reduce the cost.

Can you reduce the cost overnight? No. It is not that easy. While embarking on the cost reduction program, we need to:
  1. analyze the costs (Fixed & Variable) over the period with their benefits.
  2. have a proper Management Information System (MIS) and gather data points before jumping into conclusions.
  3. know your break-even point (BEP, the sales level where we make no profit or no loss). Any sales over and above the BEP is a profit, as it would have covered the Fixed Cost.
  4. understand the impact (Do not compromise on quality & compliance). For example, cutting on Water/Coffee/Tea supplies will make a small reduction in cost, but the impact on employees are more. Instead you can bargain a better rate!
  5. look at various alternates. For example the marketing brochures can be made in a CD (which can accommodate more matter and also cos-effective), using CFL bulbs instead of the regular bulbs (this will save energy), lease v buying, contracting v hiring, etc.,
  6. see whether you can get more out of an expense, rather than reducing it. For example, getting a better bargain out of the Annual Maintenance Contracts (AMC) by bringing in more services within the existing cost.
  7. create smaller groups among the employees and get their ideas (Employee knows better about the organisation than an outside consultant).
  8. compare the like organisations within the same industry
  9. act fast. If some costs are not at all necessary, cut it immediately.
  10. make it a practice to review the operations periodically and course correct your decisions.
We need to keep in our mind that more the fixed expenses (Rent, Salaries, Administrative expenses etc.,), concentrate on controlling them or increasing your sales revenue to cover such expenses. As we all know, the Fixed Expenses per unit vary with the sales volume and Variable Expenses (Raw Material, Sales Commission, etc.,) per unit are fixed. Confusing?

Fixed Expenses are fixed, irrespective of the sales volume. So the per unit Fixed Cost to sales will go up if the sales drop and vice versa. On the other hand, your variable expenses per unit is fixed. If the sales volume goes up, it will go up and vice versa.

Remember, it is not an one-time excercise and you need to review them periodically. Al the very best!



Raghavan said...

Good one!! thanks

Satish on Feb 4, 2009, 2:01:00 PM said...

Added to this make sure the right terminologies are used...

1. Reorganisation instead of Layoff
2. Finding Synergies instead of asking the employess to take additional work load

Bala on Feb 4, 2009, 5:40:00 PM said...

Nice article, Gopal !!

I confirmed from your content that what I carry out, as a CFO to cut down costs, is correct.

Thanks, and pls keep writing.


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