Over the last year or so, there has been a heightened debate within the business communities and events around terms such as “sustainable growth” and “cash burn”. These terms are closely associated with the modus operandi of new businesses or start-ups. In essence, what these terms mean is that start-ups are running businesses with negative cash flows. With large Venture Capital infusions, companies resorted to these practices to quickly gain market share but now that the things have reversed a lower burn Rate has turned out to be a key metric for raising funding.
Why undertake Cost Management?
Ideally for any business to stay afloat and succeed it is important that it closely monitors its costs and find innovative ways to optimise them. When the conditions turn sour, Start-ups and SMEs quickly feel the pressure to curb costs. While aggressive cost cutting can help improve the bottom line in the short-term, it can prove to be detrimental to company’s growth in future. To avoid falling prey to such situations, businesses need to adopt a robust and effective cost management strategy.
An effective cost management strategy cannot be devised from the information available on the internet. Each business has its own complexities in which they operate and hence makes a strong case for seeking a professional help.
A classic example for this can be a Garment export company operating out of Mumbai, whose executives often travel overseas for the purpose of Business development and Client relations. To some SME leaders, cutting on travel costs would be a prime target for such a business. But without the vital overseas business contacts, the long-term business growth may turn feeble. However, below are few things that the SME could look into from a Cost Management perspective:
- Is the entire team required to travel, or can few key members travel?
- Instead of multiple trips to different clients, can a round trip be structured, covering several destinations?
- Is the choice of airline governed by ‘Frequent Flier’ membership or ‘Lowest Best?’
- What class of travel is considered for travel and is there any room for savings costs here?
- Can the team take such flights that provide maximum working hours, while perhaps reducing number of hotel nights, for stay?
- Is there an opportunity of undertaking some additional work during the trip, thereby increasing productivity (which could include follow-up on collections, or operations related discussions)?
- What kind of expenses are allowed on the trip to ensure avoidable expenses are not incurred?
What is an effective cost saving strategy?
Companies may look to fix office supplies and sundry expenses but this may just yield meagre results. An effective cost management strategy is not just about saving on variable costs; rather it is about aligning all costs with long-term business goals. It also helps to have some level of systems and processes in place as they help in evaluating the impact of a cost cut and in avoiding a wrong cost cut or reverse it quickly.
In the case of professional service companies, Salaries and Benefits account make up most of the total costs and leaders expect most of the savings to come from budget cuts under this head. Rather than going for a direct cut in employee compensation as it may discourage them, companies can look at for example rationing meal reimbursements and cab services by linking them closely with the attendance pattern. This basic monitoring process can help a business plug, what could be a major leakage in the system.
The need for taking a holistic view
Most SMEs and early stage start-ups lack adequate resources and ability and thus find it difficult to take a holistic view of their finances. As a matter of fact, some SMEs even abstain from preparing a balance sheet, due to a not so strong financial reporting function. Such gaps in accounting practices later turn out to be a breeding spot for inefficiencies.
When the business environment is weak and payment cycles stretched, working capital is the first one that comes under stress. With an able CFO or a financial professional on board and strong accounting practices, businesses can find such pain points well in advance and prepare themselves to face the storm.
To grow in challenging conditions, companies must look to undertake an extensive exercise to review all their business processes, cost approval & review mechanism, supply chain systems, levels of automation, procurement policy, and employee productivity, amongst others. A detailed gap analysis will throw light on opportunities for better Cost Management across the organisation.
Another useful tool is to undertake detailed benchmarking analysis, comparing your Company’s financials against that of the Industry averages.
How can it help?
It is very difficult for businesses to operate in an environment of slower economic growth, stiffer competition and high costs of capital. It is, therefore, imperative for businesses to get their act right with the resources available in hand. Optimum utilisation of resources not only helps drive profitability but also assist in gaining market share. In fact, an all-encompassing cost management strategy would help in the most vital aspect of a business, that is pricing the goods and services right (not too low, to leave any profit on the table; but not too high as well to lose the client).
Only with detailed analysis across various parameters will give the company’s leadership an updated sense of the market conditions vis-à-vis their Company dynamics, which can serve as an important yardstick to take operational as well as strategic decisions.
Cost Management is more than just cutting costs; it’s about wise use of resources!
