Implementing a long-term strategy for reducing operating costs
According to the Office for National Statistics (ONS), one in three businesses in the UK are seeing operating costs equal to or greater than their total turnover. For CFOs and finance teams, this means that they need to introduce a long-term, sustainable strategy to reduce spending so the business can make savings to protect assets or to boost growth.
Plans to lower operating costs can be built into forecasts and budgeting but I would argue that a cost-conscious culture should extend way beyond the finance team and become common throughout the entire business.
The latest figures from the ONS come from an assessment of the impact of the Covid-19 pandemic on the economy. Perhaps unsurprisingly, companies in the arts, entertainment and recreation sectors have suffered the most, with 42 per cent of firms in those areas saying operating costs were higher than turnover, followed by accommodation and food services at 29 per cent.
Of course, we all know that 2020 has seen unprecedented trading conditions and, sadly, a large proportion of firms have taken significant financial hits. However, even for those who have seen relatively little impact, the economic recovery period is the ideal time to review what more can be done to strike that critical balance between the amount spent to keep a business running and the amount it turns over.
It starts with a strategy
The majority of businesses are unlikely to be following the same strategy they started 2020 with. In fact, some will be on the third or fourth incarnation by now. However, many will now be in the position where they can fully focus on their recovery strategy and this should be treated as the linchpin of any drive to reduce operating costs.
Start by ensuring that the strategy is communicated and understood across the entire business so that everyone is working towards a common goal. It is then time to review your costs against that strategy so you can identify those that are strategically important, compared to those you could class as non-essential.
It’s not all about profit & loss
Profit and loss statements may be a useful starting point to get an overview of accounting data when looking at cost reductions, but they often lack the granular detail needed for a fully rounded insight. As an example, your P&L statement may report expenses costs but fail to break that down into individual categories – travel, entertaining etc.
The use of multiple data systems by companies can make it difficult to gain accurate, detailed insights and make like-for-like comparisons. Overtime, inconsistencies and data distortions can have a significant impact on your ability to deliver your strategy, resulting in cost reductions being made in the wrong places and to the wrong level.
A centralised, real-time cost database allows for increased transparency and reduces the risk of data disputes. When the data is right, cost reporting is simplified, meaning defining and maintaining an efficient cost reduction program is a lot easier.
Automate and refine
The first step for many companies when it comes to cost savings is to review elements such as wage bills, suppliers and staff perks. The truth is, in the current climate, any cuts that directly impact employees are likely to have a negative impact on engagement and performance, which can limit financial gain.
Whilst cost reductions in such areas may be inevitable, one of the simplest ways to reduce operational costs without impacting on service delivery is to review business processes that can be automated, freeing up staff resource to focus on more profitable tasks.
Areas such as accounting, payroll and HR all allow for some degree of automation, helping to make these functions more efficient and less susceptible to human error, which in turn reduces cost by cutting time and money spent on correcting errors.
A cultural shift
It isn’t uncommon for businesses to introduce new cost initiatives and then fail to see lasting gains from them. Sometimes this is systematic of failing to aim high enough with the original plan, but more often than not, it can be linked to resistance to change from within the business.
The big challenge is to create an optimistic culture towards costs that centres around taking ownership and reward for continuous improvement. Incentivising staff for identifying areas for cost reductions can ensure both engagement and awareness, building a real sense of good and bad costs.
Effectively lowering operational costs can bring huge benefits to both your top and bottom lines. However, it should not be treated as a quick fix, kneejerk reaction to the current trading climate but more a long-term process that requires team buy-in, as well as regular reviews and updates.