A Focus on Cost Reduction Can Help Navigate Economic Uncertainty

In business change is inevitable. Whether such change is driven by legislation, regulatory changes, economic factors, or industry disruptors, these shifts can present both opportunities and challenges for commerce.

According to the CFOs surveyed in McKinsey & Company’s most recently released Economic Conditions Snapshot, the biggest risks to business are changes in the business and regulatory environment (37%), changes in the trade environment (20%), and changes in consumer needs and expectations (30%). However, with change, 20% of CFOs also see the chance to capitalise on market opportunities. 

Planning to meet the above-mentioned business risks and market opportunities require a competitive cost position and access to capital. So, how can you prepare to address these opportunities and optimise cashflow to respond proactively to fluctuations in your business and industry?

One way to accomplish this is to take a fresh look at your expenses organization wide and especially assess factors that may have been overlooked previously.

Here are some areas to keep in mind during your assessment:

 

Understand spending patterns

Overhead expenses should be analysed to determine bigger-picture spending patterns. This analysis is usually not performed due to lack of time and resources, but can reveal overlooked savings opportunities. A spending review will also note costly inaccuracies such as unnecessary expenses, invoicing errors, or redundant stock.  The spending analysis also provides the opportunity to establish a category baseline that can be used to measure the effectiveness of any cost reduction efforts.

 

Obtain benchmarks and develop goals

Benchmarking your expenses by category is critical in identifying overspending and prioritizing areas for improvement. Benchmarking compares one organization’s practices and performance to those of others and seeks to identify standards to apply in measuring and improving performance.  Benchmarking results should lead to the development of realistic savings goals and targets for your cost reduction program.

 

Learning about the supplier industries

This is also an opportune time to better understand a supplier’s perspective and what factors drive their profitability. Suppliers appreciate clients that are well-informed about their respective industry because such clients are usually easier to do business with and have realistic expectations. Collaboration with suppliers can reduce the cost of doing business through process improvements and requirement adjustments making you a more attractive and profitable customer.  These collaborative efforts often drive innovative solutions, as well as better deals and pricing with your suppliers.

 

Monitor results

Review the results over time to document actual savings versus your category baseline and to adjust to changes or new requirements, as needed.

An effective, sustainable cost-management program requires a strategic approach that takes into account factors such as big-picture spending patterns and benchmarking to compare your spend against market standards. By taking the steps to implement such an assessment, your organisation can be in a better financial position necessary to adjust to market changes and to continue moving your business forward.

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