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Improving Your Bottom Line
07 March 2011
If your business is like most, you will be trying to improve profit by increasing sales, but reducing costs is another good way to improve the bottom line. Cost management and profit increases can amount to much the same thing, if handled correctly!
The more you look around, the more opportunities you will find to improve profit. The evergreen equipment lease that automatically renews, the contract that hasn't gone out to bid in several years, the old fee structure that no longer provides the best price for your current business volume.
\"The truth is a significant cause of poor business performance is the lack of attention given to the costs of running the business,\" says Ruth Cohen, Principal Consultant with Expense Reduction Analysts Australia. \"Our experience suggests that around 90 per cent of businesses are overspending on day-to-day expenses, in some cases by as much as 75 per cent!\"
The reasons for this lack of attention are many, but Cohen focuses on two: \"The process of cost management and review can be difficult to manage,\" he says. \"Tough minded resolve is usually required, and cost-reduction initiatives are not always positively received by colleagues and staff.\"
\"The seller, or supplier, also possesses vital market knowledge that the buyer, or company, does not have because of a lack of resources, time, expertise - or a combination of all three,\" says Cohen.
Indeed if you can answer \"Yes\" to just one of the following there's a good chance that your business is overspending:
1. We don't have a centralised purchasing system. Each department seems to have its favourite suppliers and purchasing processes.
2. We always seem to be purchasing supplies in an ad-hoc manner.
3. We seem to stick to the same supplier and hope they're giving us value for money.
However, cost management does not necessarily mean the slashing-and-burning of budgets on a \"let's-see-if-this-works\" whim. Any manager, who chooses to undertake a program of cost-management, is probably going to find themselves out on a limb and needing to show true leadership skills.
So how does a company implement a plan of effective cost-management? Cohen suggests the following:
1. Develop a corporate \"culture\" of effective cost management
If leadership is complacent about financial performance and cost control, there is little chance that a cost-saving project will succeed. Executives must take an interest in reviewing expenses and reducing costs - often staff will mould their behaviour to match that of management.
2. Understand your needs
Determine and document your product and service requirements. Don't purchase premium services unless absolutely necessary. \"Sales people will often use bait-and-switch tactics to move you on to their higher margin items,\" says Cohen. \"You end up buying unnecessary extras or add-on services such as maintenance agreements.\" Also watch for loyalty programs - do you really want to pay higher prices for the occasional bottle of wine or rugby tickets?
3. Avoid arrogance
Never assume that you know the market as well as your suppliers - and never assume that they're providing you the best deal possible. Do you know what your competitors are paying for the same products? Compare your cost-management performance to others. \"Gather the data from outside agencies, consultants or benchmarking services,\" says Cohen. \"Be careful that you understand the data as it applies to your situation - data is useless unless it is interpreted correctly.\"
4. Centralise purchasing
You may be buying the same goods from different suppliers! Coordinate the spending of different departments to maximise discounts through bulk purchasing power.
5. Forge strong relationships
Building good relationships with suppliers can result in costs reductions. Ask them for suggestions on how to improve the way in which you work together. Could ordering monthly instead of daily allow them to reduce their own administration costs and enable them to pass the savings on?
6. But call in a negotiator
Strong relationships are fine but never allow the person in daily contact with a supplier to negotiate price. Use the good cop/bad cop approach, calling in someone else, so that emotion is not involved in the process. This also allows the day-to-day relationship to remain unaffected.
7. Continually test your suppliers
Companies that buy the same product and quantities year in, year out can become very complacent and are probably paying way too much. \"Suppliers will price their offerings according to what the market will bear,\" says Cohen. Having done your research, inform suppliers that you are reviewing your costs, which have to be reduced. Then prepare to negotiate and to comparison shop.
8. Ask suppliers to explain
Don't accept a price increase without challenge and without a review of your alternatives. Any increase must be supported by proof of supply chain cost increases, beyond the control of the supplier, and not just a blowout in the supplier's internal operating expenses.
9. Remain diligent
Cost-cutting should not be allowed to become the \"flavour of the month\". Remain motivated to keep costs in check on a regular basis. If a cost-management 'culture' is not established, employees will quickly allow your 'push' to fade away. It's important to instigate measurable strategies for cost reduction.
10. Finally, stay alert
Monitoring your cost-management strategies is vital. \"You need to watch that staff members don't slip back into old habits, the supplier charges correct prices, and service matches the agreed specification,\" says Cohen.
ABOUT RUTH COHEN
Ruth Cohen is a Principal Consultant with Expense Reduction Analysts (www.expensereduction.com) a world leading cost management and procurement consultancy. Expense Reduction Analysts goes about its business of finding extra profit for companies by effectively reducing and managing business overheads. Since 1993, Expense Reduction Analysts has successfully managed more than 14,000 cost reduction projects in over 30 countries finding average savings of 19.7% without any additional cost to the client.
For more information, please Ruth Cohen, Expense Reduction Analysts on (08) 9375 3009 or email firstname.lastname@example.org.