Written by Bill Fuesz – Sage
Recent economic headwinds are compelling companies to look at ways to cut costs.
Some finance departments are facing mandates to cut between 10% to 30% of their administrative expenses, severance aside. As finance leaders, you are being tasked to act quickly and make permanent cuts that lead to long-term cost savings.
This article gives you an overview of what you should know about cost-cutting before you do it, and 8 steps to help you find efficiencies in your company.
What you need to know about cost cutting
Before embarking on a cost-cutting initiative, this article will highlight some root causes that may be leading to excessive costs:
- Inefficient and difficult manual processes, which are error-prone and require excess labor
- Low asset utilization
- Overstaffing as compared with industry benchmarks, which leads to lower revenue per employee
- Poor methodologies and ineffective business processes
- Limited access to real-time actionable data
With those causes in mind, decreasing costs should impact the following key performance indicators:
- Profitability—if costs decrease and other metrics remain even, profitability should improve.
- Revenue per employee—if after cost cutting revenue per employee decreases, then the cuts have negatively affected productivity and revenue-generating activities.
- Customer retention, number of new customers, net promoter score—if these metrics decrease, your customers are feeling the cuts and looking elsewhere for products, services, and support.
- Order size—if order size is decreasing, it might be the result of customers experiencing issues related to low inventory levels, and many companies will lower stock levels to improve working capital.
- Asset use—all assets should be at 100% utilization and attention paid to over- or under-used assets.
When the time comes to cut costs, your choices are limited.
Things to keep in mind: There’s no magic bullet and cutting costs causes disruptions, no matter what you do. If there was, you either would have done it already or the change would have been too disruptive, despite the savings.
It’s better to look for a series of actions that can decrease costs in increments to help you reach your cost-savings goals.
If you need to cut expenses by 10%, you can probably trim this from finance departments alone—more than that and you’re looking at cross-departmental or wide-ranging program reductions.
Here are 8 action points to help you decrease costs:
- Decrease headcount
Your department may have cut costs by leaving vacant positions unfilled. However, even the most efficient finance departments have unsolved personnel issues manifested in non-effective workers. For example, those always seen talking with colleagues about non-work-related topics or who spend a lot of time away from their computer.
Identify chronic underperformers and either find ways to give them more to do—or remove their role. These are hard decisions to make, but it’s better for you and the individuals involved to terminate their employment as soon as possible.
- Keep pay increases low
Check with your human resources partner to see where your colleagues stand relative to their peers in the marketplace. If they are not below market, consider holding the average pay increase in your department to 1% or 2% less than last year’s company average. Your company will not be alone doing this in a rocky economy.
- Enable remote work
You can reduce your facilities allocation by enabling colleagues to work remotely. Instead of renting office space or purchasing and maintaining the workplace, you end up shifting the real-estate burden to colleagues, most of whom will consider remote work a benefit.
This gives you 2 additional benefits: You can move work to locations with lower cost-of-living indexes and potentially pay these colleagues less, or you can attract top-tier talent regardless of location. Remote work is one of the best cost-reduction examples for companies because you can save significant money. Notice I used the verb “enable” rather than “allow” earlier—remote work does require that you have the right infrastructure and platforms in place.
These solutions should include infrastructure-as-a-service and software-as-a-service options to help further reduce costs.
- Automate workflows
Automating workflows, such as accounts receivable and accounts payable, can lead to significant cost savings. Industry benchmarks put the fully loaded cost to process a single invoice at around $17, and this drops to $2 when the process is automated. Business-process automation reduces errors and improves accuracy. More accuracy helps cut costs and saves time.
Automation enables better integration with other business applications and business partners, and allows for the bidirectional sharing of information, so you can better manage your supply chain and transactions with trading partners.
A single connected system that integrates easily with other cloud-based systems helps eliminate time-consuming manual processes and takes full advantage of the connectivity and digital features of today’s smart devices and applications. Introducing automated digital processes for functions such as timesheets, expense claims and billing can quickly improve efficiency, enhance accuracy, cut costs, and prevent revenue leakage.
- Initiate continuous consolidations
Too often, interentity consolidations are tedious processes, which makes these time-consuming and therefore costly. Even more, delayed consolidations can mask pricey errors. Using a modern cloud-native financial management platform, you can reduce interentity errors and reconciliation time with centralized automated instructions. Currency conversion errors can be quickly eliminated, and time is saved with automated rate tables and conversions, regardless of transaction volume.
You can also create and modify entities and hierarchies without a new implementation, and allocate indirect costs, revenue contributions, assets, and liabilities across multiple entities. This gives you greater visibility while reducing the time spent on consolidations, and time is indeed money.
- Improve your inventory management
While some might argue that reducing inventory is an option to reduce costs, it might backfire, especially if you see dips in inventory due to demand. Instead, more effective inventory management can help you optimize your outlays.
Digitizing your inventory management can minimize losses and business interruptions through effective warehouse organization. Using a modern cloud-based financial management system you can set up transactions for receiving, transfers, fulfillment, adjustments, and disposal to track more accurately what’s on the books.
You can also define replenishment processes with seasonal stock level adjustments. With stock controls, you can set up economic order quantity tracking, select alternate vendors, and set-up drop shipping.
Capable-to-promise allows you to match products and services to anticipated demand while available-to-promise enables responses to customer order inquiries based on available products, resources and delivery due dates.
These capabilities help your organization more effectively manage all types of inventories with lessened risk of overstocking or short supply.
- Ensure you’re using up-to-date financial information
It’s extremely difficult to reduce costs if the financial tools you use give you stale information. As a finance leader, it’s your responsibility to use data to make informed and strategic decisions for your company.
A modern cloud-native financial management solution provides easy-to-use and intuitive financial reports and dashboards from almost any perspective, such as by entity, currency, or location. These provide real-time insight into financial and operational data, empowering you with the information you need to make decisions quickly without spending weeks creating and working with time-consuming and error-prone spreadsheet reports.
Financial reports and dashboards should give you and management a snapshot of your current financial health across the key performance indicators you’ve set, enabling you to act when it matters most—whether the information is showing a shortcoming or low performance relative to the desired goal.
What sets these apart from spreadsheets and static printed reports is the ability to interact with the data by drilling into multiple metrics, so you have a better understanding of whether you are on target, behind schedule, or performing above expectations—all in real time.
- Deploy a modern core financial platform
A few of the suggestions reference a modern cloud-native financial management platform and switching to one can help you cut costs. So, I know what you’re thinking—that type of solution is going to cost me more. But that viewpoint doesn’t consider total cost of ownership and return on investment.
When looking at Sage Intaact, a recent total economic impact study conducted by Forrester found an average-sized company would see an ROI of 441%, with quantified benefits, as follows:
- Incremental revenue gains due to more accurate customer invoicing
- Delayed and avoided hires due to improved system automation and data accuracy
- Incremental improvements in sales team effectiveness
- Increased productivity of the accounting team and improved reporting compliance
- Improved finance team efficiency and cost savings in audit reporting
After going through these and other cost-cutting measures, your department and company will be in a better place. You’ve allocated resources more efficiently and streamlined business processes and workflows. You will have increased inventory turns and minimized waste as well as slow-moving inventory.
All this should lead to enhanced profitability and an easier path to increase market share. It should also help you increase working capital.
# # #
TimeLinx delivers innovative project & service management software as a complete solution that perfects the sell-track-manage-support-bill cycle that services organizations must have to delight their customers; TimeLinx brings the cycle together in a single application that offers less frustration, better project management, complete reporting, and improved profitability – all specially designed for Infor and Sage.