As a result of the coronavirus, 2020 has been a year in which most companies have sharpened their focus on minimising risks and managing costs with a heavy hand. It is a completely natural reaction in times of crisis. Regardless of whether or not your business is affected by the coronavirus, it always makes sense to have an overview and control over your costs, and to know how you can effectively reduce costs to benefit your business’ liquidity and bottom line.
This article will give you some tips on how to start reducing your company’s costs.
Strategic and tactical cost savings
We often distinguish between strategic and tactical cost savings.
The strategic cuts are often of the greatest importance and will usually require anchoring throughout the organisation. Strategic cuts can include the way you run your company, centralisation, outsourcing and so on.
For example, you may choose to do away with a peripheral business area, as the earnings cannot justify the associated costs. It may also be that you choose to outsource some administrative functions (which often carry a significant labour cost) to an external supplier.
Tactical cost savings can include changes in processes, workflows, guidelines and procurement procedures.
For this category, you can look at e.g. optimising the existing workflows in some specific functions. There is often great potential to digitise and automate workflows that you may have always performed manually in the past.
Tips to reduce costs
- Create an overview. In order to reduce costs, you must first have a clear overview of where in the business the largest cost items can be found.
- Set a concrete and ambitious goal. If you do not have a clear goal that you want to achieve, you increase the risk that the process will not go as planned. It is also true that if you set an overly cautious goal, you will end up with a worse result than expected. A normal (and not so ambitious) goal is around 10 percent. How much should your costs be reduced by?
- Prepare and stick to a budget. This is usually the key to good cost control.
- Focus and follow-up. Cost management is not something you do once a year, it is continuous and systematic work that is done over a long period of time and is never fully complete.
If you do not succeed
We don’t always succeed in reaching the goals we set. If you do not reach your target for planned cost savings, here are some possible reasons why:
- The costs increase in proportion to the savings.
- There is a lack of understanding in the organisation and thus a reduced effect or a relapse.
- There is a lack of understanding of what the costs cover.
- The project plan is insufficient.
- The implementation strategy is too weak.
Before you start reducing costs, it is important to be aware that costs do not usually come out of nowhere. There is usually a link between activities and costs. If a cost reduction will significantly affect some activities, you should evaluate whether or not those activities are actually profitable.
Most companies have both profitable and less profitable activities. It is therefore only natural to look at whether your company should cut back on some of the products or services you provide, so that you can focus on delivering the goods and services that provide the best possible profits.
Reduce costs whenever you can
Reducing costs often requires a lot of resources. At the same time, it is important to think about the best solution for your business in the long run.
Therefore: reduce costs when you CAN – and not just when you MUST!
How can Azets help?
As mentioned above, it can be a sensible strategic decision to entrust some of the costly administrative functions to an external supplier in order to achieve greater flexibility and eliminate fixed labour costs.
At Azets, we handle e.g. payroll and accounting for our customers, who thereby achieve security, reduced vulnerability and not least – in relation to cost – a flexible and scalable solution.
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