The unpredictability of sales and the resulting, potentially devastating cash flow implications from the Covid-related challenges hitting businesses, means that anyone making financial decisions needs to be more agile than ever before. Whether you are seeing a rapid growth or suffering a massive slow-down in demand, managing cash is vital for survival. Careful cost management is one way to support this.
We have pulled together some key points around cost management that are critical to understand, plus some top tips on how to do so.
Covid has created a divide in business growth: some businesses are seeing a rapid acceleration of demand for their products and services, bringing the risk of over-trading and cash-flow damage if not carefully planned from a financial perspective. Other organisations are suffering a massive slow-down in demand, creating the very real worry of running out of cash.
Either way, it’s clear that managing cash flow successfully is absolutely vital for most people in most organisations right now. ‘Most people’ includes those working in operational business areas and is absolutely not limited to those in the Finance teams: they will be working on managing cash flow at a high level for their organisations, however operational people, budget holders and anyone who makes decisions resulting in spending business money can make a big difference too.
When organisations mention the need to manage costs, it can feel overwhelming, stressful and uncomfortable. Sometimes, it may feel the only thing to do is to cut x% across each part of your budget as your starting point. That achieves nothing at all, other than changing some numbers on a spreadsheet. There is no plan on how this cost reduction would work in practice and no understanding of how these changes would affect the ability of your business to achieve its goals.
So, how can this be approached in a more methodical, impactful way?
One suggestion is to take a look at the activities that you and your team undertake. This needs to be a team effort – can you ask those within your team to keep a record of the activities they undertake each day, how long each took, the purpose/objective of each activity and, if possible, how each activity adds value to your organisation? If this data can be gathered over a month, it would be a fantastic baseline for you to work with.
Clearly, such a suggestion would need to be handled with tact and care – you will need to use consideration and compassion in how you explain to your team why you are doing this. It’s important to emphasise that it is not to criticise them for wasting their time, but that it’s to help understand better what they do and to use this data as a springboard to create more efficient ways of working that will benefit them as a result. If you don’t feel confident doing this, speak to your peer group/manager/HR team to ask for help in how to approach it.
Often, activities are being carried out because that’s ‘just the way we have done things’ for the last x years. I.e. they have become routine and there is little doubt that these activities were initially started for the right reasons. But the question is, does each activity still add value? Ask yourself when did you/your team last review them?
Take a look at the diagram below and use this as a guide to work through the process.
Understanding cost behaviour is also valuable alongside your cost management strategy. Are you looking for short-term wins? If so, you need to focus on variable costs or the variable part of your semi-variable costs. Think along these lines – at a personal level, if you switched your food shop from a high-end supermarket to a budget supermarket, you would make an immediate saving. How can you translate this to your business spend?
If long-term, potentially bigger cost savings are the plan, you need to focus on fixed, stepped or the fixed part of your semi-variable costs. Using another home-based scenario, you might have a mortgage that requires you to pay a higher interest rate than is currently available – if you switched to a lower rate, would you make some beneficial savings even after paying any redemption/other fees that are due (please don’t take this as personal financial advice – use a financial advisor to help you with this!)? Again, how can you translate this into your business environment?
The diagram below gives some examples of each cost type and shows you how they typically behave over a 12-month period.
4 ideas to get you started:
Here are just 4 ideas to get you started: some of these will make bigger savings, some smaller, but remember that every penny counts – I’m sure I’m not the only one whose parent told them to ‘take care of the pennies and the pounds will take care of themselves’! Some of these ideas might be relevant to your business, others perhaps not – either way, they will prompt you to start thinking along the right lines.
- Perpetual payments, i.e regular payments/contracts/subscriptions:
- Check every single one
- What is the REAL benefit to our business of continuing to pay this?
- Do we still need it?
- Can we negotiate a better deal with our existing supplier?
- Are other suppliers offering a better deal?
- Can you pay your suppliers early (yes, you read that right – early, not late!). Paying suppliers early not only builds an excellent relationship built on trust in both directions, but you would be surprised how many suppliers would offer a discount to get the cash in their bank sooner.
- Complex expenses, i.e. a business expense that has a number of goods/services attached to one cost, for example, a mobile phone package with agreed limits on call time, text messages, photo/video messages, data usage, etc:
- Re-evaluate these – what are you actually paying for?
- Are you using EVERYTHING that you are being charged for?
- What could you lose from the contract without causing a loss of value to your organisation? Cancel anything not utilised or re-negotiate the deal so that it only covers what you actually use.
- Are there items that you use in relation to the expense, but that are being charged as extras outside of your package? Can you build that into your deal, and would it save money?
- Value for money:
- Cheap can be a false economy: how soon will the item need to be replaced compared to other options?
- Look at whole-life costs, for example running costs, maintenance/servicing, replacing consumables, de-commissioning, etc. Never focus on just the purchase price.
- Can you negotiate additional value within the price quoted? For example, you may be able to convince your supplier to add some ‘extras’ into your deal, such as free training/support for 12 months on some new software.
- Will you REALLY use everything being offered? Purchase only what you need.
Getting the right mindset
Finally, having the right mindset to manage costs is critical. If you are feeling defeated before you start, or that all of the costs your team incurs are vital and cannot be reduced without significantly impacting performance, have a think about the words below – use them as mantras to guide you and your team into looking at cost management more objectively:
Need further help or guidance?
How is your organisation handling its current financial situation?
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Or if you would like to sign up to our free webinar discussing cost management techniques and ideas in more detail and with time for Q&A, please let us know. It will be on Friday 14 August, from 2-3 pm.
Email Helen to secure your place.