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.

Business First - - CONTENTS - by 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.

Al­lan McKeown

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