Managing a company cost-effectively is part of making sure your business is running successfully. Moreover, companies need effective cost management to prevent further loss during an economic crisis. Especially amid the COVID-19 pandemic that has caused many businesses to shut down, survival becomes an absolute priority.
Have a look at our previous article about A Business Survival Guide for the COVID-19 Crisis
Many companies, whether big or small, sometimes simply cost cut rather than effectively cut costs. And often, this creates unforeseen problems in the future and jeopardizes relationships with customers and employees. Thus, it is crucial to employ an effective cost management strategy that benefits all parties involved.
Implementing cost management strategies
Cost-cutting is a reactive short-term response for seemingly urgent problems that may cause complications as much as solutions. On the other hand, effectively cutting costs is a proactive long-term strategy that will ultimately benefit customers, employees, and the company in the long run. Simply put, effective cost management is cutting back on certain costs in a way that would still be beneficial to the company instead of reducing important aspects (that is, cost-cutting) such as product quality, customer relations, and the company’s integrity.
Cost-cutting entails that companies may, for example, go for cheaper raw materials that produce low-quality products rather than reducing less important overhead expenses. Here are some cost-effective management techniques that may be more useful than simply cost-cutting.
1. Avoid lessening raw materials or switching to lower quality ones.
Maintaining a high quality of products and services is key for businesses to keep their customers contented. However, cost-cutting tends to compromise it. Therefore, it is not helpful to cut back on raw materials that are directly attributable to the satisfaction of customers, thus, to the revenue of the company as well. Companies must learn to correct wasteful expenditures by implementing the following cost management strategies:
- Changing to normal delivery from express delivery of long shelf-life raw materials;
- Outsourcing the processing of some product parts rather than in-house manufacturing;
- Minimizing the packaging and advertising to a bare minimum;
- Switching to e-commerce sales from traditional brick and mortar business;
- Dropshipping for online sellers to eliminate the need to rent from inventory storage facilities;
- Condensing suppliers to get bulk rates, or simply paying several utilities for a lesser price (i.e. one company to provide Internet, telephone, and television services).
2. Minimize fixed costs rather than variable costs.
Variable costs or corporate expenses directly increase or decrease with the level of output, which can be changed depending on the cash flow situation and business needs. For example, instead of lessening guaranteed payment amounts for employee performance, implement performance-based compensation for jobs-well-done. By minimizing fixed costs, companies whose output and revenues often fluctuate can also minimize their costs by doing so.
3. Review current vendor contracts and make automatic renewal optional.
Automatic renewal of contractual obligations to vendors for purchase agreements and terms should be optional to give way for effectively cutting costs. Before switching, review major vendors and quantities regularly purchased. There may be instances where a company pays for purchase volumes that exceed their needs.
Long-term relationships with vendors are a plus and there are smart ways to manage costs instead of canceling vendors outright. These include empowering employees to ask for discounts and rebates and checking supplier invoices carefully for overcharging. If searching for new vendors is the pleasure of the company, it is best to have several prospective vendors (including previous ones) and try to make the best bidding offer to help ensure better pricing. This way, companies can source cheaper suppliers who will still offer the same cost with the same level of service and products.
4. Develop and hone the skills of employees.
Empower employees not just to haggle discounts from vendors. Once they are involved in the decision-making, team-building, and problem-solving activities of the company, they are also able to control their costs and produce ways on how the company can save better.
Helping employees understand how to control costs, improve quality and productivity, and enhance performance can bring the best in them. Company management can do this by providing accurate cost information and how this relates to company objectives and giving them incentives to become more involved. Since these are the people who face the operations directly every day, they will have insight into the work and possibly how to do it better and cheaper.
5. Outsource functions rather than using in-house talents.
Some company functions may equally be effective despite being outsourced. Some cost management techniques involve outsourcing to workers around the country (or even the world) a company’s several functions. These include:
- Accounting and taxation functions;
- Legal services and researches;
- Outbound and inbound call handling;
- Business expertise and consultation, etc.
The company may be able to avail of the cheaper cost of services from outsourcing business processes as well as access to some of the brightest talents out there.
6. Invest in accounting and management software.
Capitalizing on technology streamlines business operations and allows small businesses to compete with larger ones. Accounting software may come off as expensive and unnecessary, but the truth is, it benefits the company in many ways. Furthermore, the success of startup businesses has given rise to much more affordable yet competitive digital accounting and company solutions such as Kwikdroid.
While bookkeepers, on their own, can perform manually most features an accounting software has, but the time saved, resources maximized, integration of company processes, as well as the expertise of trained accountants who develop and maintain the system, are all invaluable. Acquiring well-incorporated systems such as Kwikdroid is like having a robot accountant and assistant in one. Some of the functions that can be easily accessible with Kwikdroid include:
- Real-time overview of the company’s operations and performance;
- Invoicing and transactions recording through OCR technology;
- Performing bank reconciliation process with automated multicurrency function;
- Scheduling and assigning meetings;
- Managing contacts and securing employee’s information;
- Keeping track of purchase;
- Overseeing project completion and approving leave requests;
- Managing payroll and automating tax updates.
Hence, not having to rely on several systems is money well spent and time and resources well-saved.
Conclusion
Understanding the cost-revenue structure of your business is the most important aspect of effective cost management. If you identify how much is coming in from which products and services and what specific costs are directly related to these revenue-generating activities, then you can analyze better which costs to cut in a way that will not permanently harm the operations of the company, your relationship with vendors and employees, and your reputation among the customers. You do not need to slyly cost-cut to stay on top. You just need to understand effective cost management techniques.
Contact Us
If you are interested in Kwikdroid, contact us or go to our Kwikdroid page to request a demo and see the prices and packages we offer. You can also check our tax and accountancy page to know more about our specialist services.
S.J. Grand also offers Cloud ERP services for your business if you are currently experiencing difficulty in managing your operations amid the COVID-19 pandemic. Check out our IT services page for more details.
