Strategies to drive savings as storm clouds gather
Australian businesses have so far weathered the storm created by the global financial crisis. The recent federal fiscal responsibility budget however, will require bracing for still more challenging times ahead writes Allan Mckeown.
is the CEO and
Founder of Prosperity Advisers.
With continuing questions about long-term growth rates, businesses are often left with only one option to improve profitability cost reductions.
Tough decisions that tend to involve workforce reduction and increased productivity from existing employees are areas sure to be examined. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider - 1. Product lines and customer segments Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability. 2. Inventory Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies. 3. Outsourcing Many businesses are gaining significant cost and operational efficiencies from outsourcing non-core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction than perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise to your business, allowing your team to concentrate on strategy and execution. 4. Suppliers Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs. 5. Employees Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.
While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to longterm improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties. Allan McKeown is the CEO of Prosperity Advisers. He has over 25 years experience providing business growth advice, corporate assurance, and strategic taxation services to a range of business clients. Asset Magazine has rated him as one of Australia’s ‘Magnificent 7’ Financial Advisers and he has extensive experience as an independent Director of businesses in a number of industries including Power, Ports, Banking and Professional Sport.