With the year ahead shaping up to be just as unpredictable as the last, finance leaders at companies large and small are left wondering how best to react to a continuing backdrop of economic and political uncertainty.
While forecasting, budgeting and strategic planning all play a crucial role, another spanner in the finance director’s toolkit is cost reduction.
In the past cost reduction has often been viewed as a crisis-management instrument, used to counter declining revenues and profitability. However, if used correctly it can also be used to bolster an organisation’s performance, regardless of whether it is on course to hit its cost targets or not.
A recent Accenture study highlighted that nearly a quarter of CFOs think that their companies as they exist today will die, while 58% believe their industries will be disrupted and some competitors will disappear. The same research also highlighted that only 6% of CFOs consider cost management to be their top strategic priority in 2016.
While it may not be top of many finance director’s priorities, maintaining a flexible cost structure plays a part in maintaining profitable and sustainable long-term growth.
With that in mind, here are five quick-fire ways to start thinking about cost reduction for 2017.
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Make a targeted plan
Why is this necessary? Any cost reduction programme needs its background and desired outcomes clearly defined. A complete analysis of spend and establishing a hierarchy of cost will allow you to set some priorities. Taking out the wrong costs could be worse than taking out no costs.
Perceived wisdom states that targeted cuts are preferable to across-the-board reductions. The most effective way to cut costs meaningfully is to take out entire functions or activities rather than tinker round the edges.
When done well, a targeted programme of cost reduction can detect and remove activities and processes that do not drive value, resize the business for tasks identified as adding value, assign the right people to those tasks and tracks outcomes.
Roll back complexity
Sustainable cost reduction is achieved by removing unnecessary complexity that adds cost but no value.
Many organisations, including some of the most successful in the world, have grown organically rather than adhered to a strict growth plan. While this has worked for many businesses it can result in a degree of structural complexity, as subsidiaries, departments, products, services, sales channels and legal structures spring up around a successful organisation.
At the crossroads of the business, where operations meet finance, the finance director can bring benefit to their organisation through simplifying these existing structures such as reduced internal administration costs, reduced external and internal audit costs and improved transparency.
Other potential advantages could include potential tax benefits, GAAP reduction (for example conversion to IFRS), reduced demands for internal support and access to cash that may be trapped in the business.
Real-time data and financial control
While financial control is an obvious part of the finance leader’s role, maintaining effective internal control continues to be a critical issue, especially in an era where data and how it is used seems set to define whether businesses survive.
Effective financial control depends on fast access to critical information. Through a partnership with their IT leader or an outsourced solution, the finance director must try to ensure that real-time information is available for decision-making.
This includes developing tools that can analyse and report key information such as financial models, dashboards, business intelligence, and customised metrics that track an organisation’s performance continuously and accurately.
Whatever actions are taken, it is imperative that they are understood by all business stakeholders, even if they might not agree with them.
Getting buy in from all business stakeholders, particularly from your finance team, who are likely to be the ones supporting you in driving these changes, is key to making any changes sustainable.
See it through
While it makes sense to implement cost reduction measures to offset global economic uncertainty or declining revenues or profit, the measures should not be viewed purely as a one-time process.
Rather, the measures should be seen as a key component of any organisation’s strategy, based on efficiency improvements that add value to the organisation.
It makes sense, therefore, to continually return to the reduction programme on a regular basis to continue to look for efficiencies.
Have you been through a programme of cost reduction recently? Do you have any tips on how to plan and implement such measures?
About Tom Herbert
Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.