The year to cut costs

For most businesses 2010 is looking to be a challenging year. Whilst this is a welcome improvement on a turbulent 2009, only a lucky few will have felt confident putting revenue increases in their business plans. Low levels of government spending, restrained consumer expenditure, rising unemployment and inevitable tax rises do not paint a pretty picture. The banks also will not recover fully any time soon; thus limiting credit to businesses and consumers alike. With such a gloomy economic outlook, businesses cannot count on a bounce back in demand to deliver growth. So is there anything businesses can do to grow?

Carry on as you are
Amazingly this may just work for businesses despite the fact the size of their markets have remained flat. There are expected to be a large number of business failures in the back half of this year when the HMRC tax holidays come to an end. With fewer companies around, there will be more of the pie to share between those that are left. A dangerous strategy though – will your company be the one that survives or dies?

Steal Market Share
Of course most businesses will be trying this option. However, stealing market share is incredibly difficult to achieve. Businesses are in competition with each other every single day and sadly, in the current environment a lot of businesses will be paying attention to this so competition is tough

Review your costs (yes again)!
Most businesses have done some kind of cost review during the recession. The benefit of reducing costs is clear; all the savings go straight to the bottom line.

Think how much a business would have to increase revenue by to get the same addition to the bottom line and how difficult this would be in the current climate. For example, take a business with revenue of £1m with a 20% profit margin. Reducing your £800k cost base by £50k would increase your profits from £200k to £250k. If you were to try and increase your profit by £50k by increasing revenue you would need to generate an additional £250k in revenue, which is a staggering 25% increase.

Costs need continuous management just like every other aspect of a business so businesses need to make sure they have a strategy in place that maintains a constant downward pressure. If they don’t then they may miss opportunities to reduce costs, or even worse, costs will start to creep up. Remember that your suppliers are facing the same pressures on revenue that you are so they will be looking for ways to increase their revenue too. This needs careful monitoring to ensure costs do not start to creep up.

Of course cost management requires time and expertise, which is why it often only gets irregular attention. Most businesses will have a handful of areas that account for most of their costs. Normally rent, staff and the cost of goods (industry dependent) will make up about 80% of the cost base, with a much larger number of other overheads making up the remaining 20%. Businesses quite rightly put most of their effort into managing the larger costs as these are likely to bear larger savings. These larger savings make it worth the investment of management time.

This is not the case for the ‘long tail’ of smaller costs which can be complex and often have hundreds of suppliers in the marketplace which are rarely tendered as effectively as they could be. Consideration should be given here to outsourcing. Although a relatively new industry, there are companies out there, such as Auditel that specialise in these markets and buy on behalf of thousands of businesses; thereby getting the best value and avoiding rogue suppliers. This leaves management time free to concentrate on the larger cost areas and the difficult task of increasing revenue.

For further discussion, contact David Egerton, Cost Management Consultant with Auditel on +44 (0)20 8265 2537 or at david.egerton@auditel.co.uk.