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 cost-effective), using CFL bulbs instead of the regular bulbs (this will save energy), lease vis-a-vis buying, contracting vis-a-vis 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 organization than an outside consultant).
8. Compare similar organizations 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.,), the more we should concentrate on controlling them or increasing our 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 exercise and you need to review them periodically.