You are on page 1of 4

Directors’ Briefing Strategy

Cost control

Cutting costs is the simplest way to improve advertising space), premises, telecoms,
your bottom line. Introducing a cost control travel, transport and financing costs.
system can bring immediate savings and
ensure that you remain competitive in the 1.3 Choose the costs to focus on first.
longer term.
• Costs that may offer easy savings (see 5).
But cost control needs to be carefully • Large costs that you may be able to
managed. While eliminating wasteful activities change in the short term.
is clearly beneficial, indiscriminate cost cutting Fixed costs (eg long-term fixed rate loans
can lead to falling quality and poor morale. or fixed price contracts for raw materials)
are hard to control in the short term.
This briefing covers:
Some cost centres, such as R&D, make
• Identifying where to focus your efforts. important but indirect contributions to your
• Managing cost control. bottom line.
• Specific cost control opportunities.
• The pitfalls. You need to account for these contributions
before deciding on cutting their budgets.

1 Your costs

Cost control works best as part of your routine


financial management. The first step is to look
at your existing costs.

1.1 Identify your major cost centres.


Typically these might be purchasing,
production, sales and marketing, financing,
administration, premises, facilities
management and R&D.

• In a small business, a cost centre is usually


the area one manager is responsible for
(see 3.1).

1.2 Identify the major types of cost within each


cost centre.
These might include staff costs, raw
materials and supplies, utility bills for energy
and water, capital expenditure, other
purchases (eg consultancy services and

England Updated 01/10/05


Directors’ Briefing 2

2 Systematic cost control cent of all production to be wastage, raising


unit costs.
2.1 Start from your business objectives. • Budgeted costs may sometimes be lower
For example, you might aim to manufacture than standard costs.
1,000 units per month, or to win ten new
customers. 2.4 Record your actual costs and compare
them with the standard and budgeted
• What are your quality standards? costs.


For example, your customer service It may be appropriate to compare unit
standards might require a trained employee costs (cost per unit produced) or total costs
to respond to all enquiries within a specified (including overheads such as premises). We always
time. advise people to
• Costs that are higher than your budgeted take a ‘top-down’
2.2 Establish your ‘standard costs’ for costs may indicate opportunities to reduce approach first. That
achieving your objectives. costs in the short term. way you don’t miss
Standard costs are the costs you would In general, the larger the cost overrun, the anything and you
more scope there should be for savings.


have in an ideal world (but see 2.4). don’t inadvertently
cut something
You need to consider: • Costs that are higher than your standard vital.
• What resources you need. costs usually indicate opportunities to John MacNamara,
• How much of the resources you need. reduce costs in the longer term. Cost Reduction
Standard costs assume optimum • Lower costs may indicate good Analysts
performance (eg no unnecessary wastage management, but might also reflect quality
of raw materials or staff time). failings or impending problems.Using a
spreadsheet or cost control package, it is
• What the resources cost. easy to record and compare costs on a
regular basis (eg monthly).
2.3 Establish realistic ‘budgeted costs’ based
on your actual experience. 2.5 Periodically review what you are doing and
how you are doing it.
• Budgeted costs will usually be higher than
standard costs. • Benchmarking yourself against other ➨For more
For example, you might expect two per organisations may show that your information on
performance is sub-standard. benchmarking
Deregulation For example, if your wastage levels are and the benefits
higher than the industry average. it can offer, see
Benchmarking.
A Prices of gas and electricity have fallen • Internal review, or input from an external
as a result of competition — though this consultancy, may suggest alternatives. ➨For information on
is unlikely to continue. For example, standardising components to energy efficiency,
Businesses are no longer restricted to reduce design and manufacturing costs. waste minimisation,
buying from their local suppliers. and all the help
on offer, see Your
• Suppliers can offer tailored pricing 3 Who is involved? business and the
packages, based on your requirements. environment.
Remember to compare like with like 3.1 Each cost centre is usually the responsibility
when looking at competing quotes. of one manager.

• Suppliers may offer additional discounts • Some costs can be easier to control if
for buying both electricity and gas from one manager is responsible for that cost
them, or paying by direct debit. throughout the organisation.

B Choose a supplier that offers the right 3.2 Involve employees in cost control.
quality of service. Look for:
• Employees can suggest cost-saving ideas,
• A flexible contract which suits you (eg especially if there is an incentive to do so.
guaranteed prices). Ask what causes them problems or wastes
• Added value services such as technical their time.
support and energy efficiency advice.
• A supplier with a good track record. • Employees are more likely to co-operate
with cost control initiatives if changes are
explained to them.
Directors’ Briefing 3

3.3 Include your customers and suppliers. such as cutting the cost of supplies (see 4). ➨ If you use a
consultant, a
• Ask your customers if you are providing In others, cost reduction will require changing good brief is vital.
them with anything they do not need. the way you do things. Some of the most See Using a
• Your suppliers will know what other common opportunities are listed below. In every consultant.
purchasing options are available that might case, be aware of the potential pitfalls (see 6).
suit your business.
5.1 Reduce your payroll costs.
3.4 External consultants can be a useful
resource (see 7). • Outsource non-core activities.
• Use consultants, freelances or part-time
employees, instead of full-time employees.
4 Easy savings • Redesign processes to eliminate duplication
of effort and to cut out activities that waste
Some costs can be reduced with little risk of an time.
adverse impact on quality and performance. • Make more use of technology and
automation.
4.1 Checking supplier invoices may reveal • Do not overpay when recruiting new
overcharging. employees.

• Common examples are double billing, 5.2 Improve your purchasing.


incorrect charges and missing discounts.
• Switch to cheaper suppliers, or negotiate
4.2 Eliminate unnecessary costs. price reductions or higher discounts for
early payment.
• Get rid of obvious overcapacity (eg unused • Consolidate purchasing with fewer
telephone lines). suppliers to get better discounts.
• Cut out blatant waste (eg heating premises • Agree long-term supply contracts or
at night, or with windows open). guarantee minimum annual purchase
• Scrap useless processes (eg paperwork volumes in return for lower prices.
that is completed, filed and forgotten). • Build personal relationships with suppliers
to encourage preferential treatment.
4.3 Crack down on excessive costs. • Simplify purchasing procedures to reduce
your costs, and those of your suppliers.
• Use second class postage, or email or fax, • Form strategic buying alliances (eg
unless only first class post will do. purchasing consortia) with businesses in
• Find alternatives to high priced suppliers, or your area or trade to buy larger volumes.
negotiate discounts. • Give individual employees purchasing limits
• Avoid over-specifying (eg high-quality to reduce administration and ask your bank
components for a low-quality product). about purchasing cards.
• Ban wasteful luxuries (eg full-fare business
class flights). 5.3 Find ways to make production more
Cutting back on items employees see as efficient.
‘benefits’ or ‘perks of the job’ needs careful
handling (see 6.1). • Trim back your product range and increase
production runs.
4.4 Root out inefficiency. • Use standard components to lower design,
purchasing and manufacturing costs.
• Identify manual, paper-based systems that • Change processes to minimise wastage of
could be replaced by computers. raw materials and energy.
• Avoid frequent small orders. They waste • Improve quality control to cut rejection rates
time and may mean you lose discounts. and reworking costs.
• Consider switching to single monthly
invoicing to cut processing and admin 5.4 Review your finances.
costs.
• Finance fixed requirements using loans,
instead of overdrafts.
5 Opportunities • Reduce unnecessary overdraft and loan
facilities.
Effective use of a systematic approach will • Cut back on working capital through just-
highlight opportunities to control costs with little in-time purchasing, better credit control and
risk. In some cases, there will be easy savings agreeing longer payment terms with your
Directors’ Briefing 4

suppliers. (See Credit control.) driven by cost-cutting considerations are Expert


• Apply for grants and subsidised loans. unlikely to be responsive to customer contributors
requirements.
5.5 Get the most out of your premises. • Tighter control of financing may leave you Thanks to John
with no safety margin when cashflow is MacNamara (Cost
• Introduce homeworking or hot desking to unexpectedly poor. Reduction Analysts,
cut space requirements (and travel costs). • Cutting short-term ‘investment’ costs (eg 00 353 61 400580);
• Reconfigure existing premises and work training, advertising, equipment or new Neil Britten
flows to minimise wasted time and space. product development) can lead to long- (BLN Associates,
• Sub-let spare space. term weakness. 0117 915 4024).
• Control utility costs. • Attempting to control unalterable costs is
itself a wasteful process.
5.6 Cut the cost of communications. (See Managing your cashflow.) Further help

• Use email whenever possible. There are other


• Use the corporate intranet to reduce 7 Consultants Directors’ Briefing
duplication of information and unnecessary titles that can help
meetings. 7.1 External consultants can offer an you. These briefings
• Use cheaper telecoms facilities (eg advantage over purely internal cost control. are referred to in the
alternative suppliers, leased lines). text by name.
• Consultants may have up-to-date,
specialist knowledge.
6 Pitfalls For example, they may be acquainted
with up-to-date benchmarks for your
Reducing costs can be damaging. Before industry and current market conditions
making changes, check that your standards for utilities and other suppliers.
will not be compromised and that your ability to
meet objectives will not be harmed. • A consultant’s thinking may be able to
avoid being influenced by vested interests
6.1 Reducing costs which directly impact on and historical preferences within your
employees is fraught with difficulty. company.

• Employees are not machines. 7.2 Select a consultant carefully.


The work performance suggested by time
and motion studies is unlikely to reflect • Look for membership of an established
people’s actual behaviour. and appropriate professional body, with a
published code of conduct.
• Reducing costs such as training and For example, the Chartered Institute of
meeting times is often counterproductive in Purchasing and Supply (01780 756777;
the longer term. www.cips.org).
• Introducing improved procedures can be
difficult and expensive. • Check references and look for evidence
Employees may be resistant to change, of a good track record, working with
and may need extra training. businesses comparable to yours.
• Find out about the consultant’s financial
• Poor conditions, pay and benefits will not standing and check that there is indemnity
attract and retain good employees. insurance cover in place.
• Changing an existing employee’s terms and
conditions, to the employee’s detriment, 7.3 Negotiate a clear, written contract. © Business Hotline
can be a breach of contract. Publications Ltd 2005.
• Making employees redundant brings • Agree what you will pay. ISSN 1369-1996. All
rights reserved. No
short-term costs and the risk of possible If fees are to be based on a percentage of part of this publication
employment tribunal proceedings. savings, agree how these savings will be may be reproduced or
It may also damage morale among those calculated. transmitted without the
written permission of the
who remain. publisher. This publication
• Arrange when you will pay. is for general guidance
6.2 Almost every cost saving has a potential Avoid having to make upfront payments, only. The publisher, expert
contributors and distributor
downside. For example: before you can see the results of a disclaim all liability for
consultant’s work. any errors or omissions.
• Over-dependence on one supplier puts you Consult your local business
support organisation or your
at risk if the supplier fails. • Insist that the consultant signs a formal professional adviser for help
• Production and marketing plans that are confidentiality agreement. and advice.

Published by Business Hotline Publications Ltd, 240a Lavender Hill, London SW11 1LE
Tel: 020 7924 1137, www.businesshotlinepublications.co.uk