Cost Evaluation During Crisis
An effective cost management strategy is designed to maximize value and minimize both initial and ongoing costs. A number of different cost management strategies exist to help small-business owners make these important decisions.
Businesses are in a constant search of finding ways to increase their top-line and ultimately increasing the bottom-line but sometimes they do miss out on things which are between the two i.e. the Costs. During this pandemic situation where business are struggling to keep up with their profitability and liquidity, effective cost management would help them to increase both.The following cost management outlooks could be considered while reviewing the costs which the enterprise incurs.
Relevancy of the costs: When the businesses are going well they tend to ignore expenses which are most of the times wasteful. One can test the relevance of the cost by putting it through 2 questions viz. Does this cost directly or indirectly add value to the customer services or will this cost generate revenue if it is incurred in case answer to both of them is negative the company should reconsider the allocation of funds to such costs and avoid incurring the same.
Revisiting the planned CapEx: Businesses have their CapEx planned for the year based on their expansion plans and other operational strategies. During times where companies is trying to manage their profitability as well as liquidity it would be worthwhile to review the CapEx planned for the year postponing or deferring such expenses will have a positive impact on the liquidity also could also save the concern from damages for the breach of the same.
Reviewing existing contracts: Reviewing the existing contacts and determining their feasibility based on the execution capacity of the firm or reviewing the net effect of the inflows for the contracts. It would make sense to discontinue contracts which are cash negative and do not add value to the company.
Outsource non-core activities: Outsourcing non-core activities like HR, payroll, accounting etc. can significantly lower the overhead burden as these service providers manage other similar businesses thus lowering their costing and in turn benefiting their clients.
Pulling and Aggregation: Businesses dealing in verticals having similar raw materials/inputs can aggregate their requirements will give them better bargaining power with the suppliers. For example: Component manufactures for two wheelers and four wheelers can combine their requirement for alloys.
Variabilization of Costs: You know what keeps the C-suite awake at nights? Fixed Costs. It is hard to imagine a business where there are no fixed costs but however the management can look close the activity levels and evaluate whether they could variablize them to make effective savings.
Business and Product portfolio analysis: Small and Medium Business which are diversified in to various business and product segment need to get rid of units which provide a lower contribution in recovering the costs and it should be observed at entity and unit level. Sometimes business miss out on conducting such reviews and thus the profits from higher contributing units are eaten up by the lower ones. The management can monetize on the assets of lower contributing units and invest them in the higher ones thus increasing the overall profits of the entity.
Cost evaluation and change implementation are easy said than done it requires rigorous analysis and a wider outlook, one must have an approach of making breakthrough savings, otherwise the person could end up being penny wise but pound foolish and miss out on the bigger picture. We would recommend running simulations and preparing projections so as to evaluate the impact of the decision.