Cost management: rapid tactical changes or a more structured approach?
When circumstances mean that business owners have limited control over their revenue, the only remaining avenue to prop up profitability is focusing on the cost base. It’s always worth being aware of what interventions you might make in spending to maximise your profitability and minimise the risk of fundamental damage to your business.
Some businesses need rapid tactical changes to their costs, and others need more measured structural interventions to cost management.
Situations in which cost management come to the fore include each of the below:
- As and when a business buys or sells a separate business or a division
- Improve a business pre-sale to maximise price
- Realise and retain cash for future acquisitions
- Realise synergies after acquisiton and position for growth
- Short term sales decrease
- Protect margins – sharp stop on discretionary spend
- Focus on low hanging fruit to realise quick wins
- Secure potential funding/re-financing to bridge any gaps
- Revenue growing but profit margin decreasing
- Mix growth plans with cost cutting
- Optimise size of back office to set up for profitable growth
- Embed principles of cost control for future
- Longer term revenue loss
- Assessment of all business priorities
- Reduce back office costs
- Concentrate on value leakage
- Available funding is reduced or more work is required for the same funding
- Increase efficiency
- Assess how to get more for current cash spend
- Under stress
- Debt covenants with funding providers in danger of breaking
- Trouble refinancing
- Severe margin loss
- Cash required
- In distress
- Ensure survival
- Cash required immediately
Each of the situations above requires a specific response – the situations are matched by number on the chart below.
There are a few key principles that should be considered when planning cost reduction initiatives.
Firstly, a balance should be struck between releasing cash and reducing costs quickly, and making major structural changes to the cost base. This is key for long term sustainability.
Businesses should start by taking a holistic approach to evaluating their current costs, while at the same time examining working capital and margin improvement opportunities. This addresses cash levels throughout the business rather than prioritising cost cutting.
This should be done by focusing on core processes and practices while taking into consideration current risks and controls, and establishing a very clear linkage between operational drivers and financial results.
Such a complex project has to be well executed, coordinated and tracked to ensure that financial benefits hit, and stay clearly identifiable in the balance sheet, P&L, and cash flow.
It is tempting to rush into a quick and easy but ultimately damaging cost reduction exercise. A structured, coordinated and considered approach can mitigate this risk.
At Ballards, we have extensive first-hand experience of cost reduction across multiple sectors.
We offer pragmatic non-theoretical solutions and hands-on support for implementation.
We combine deep IT and operational know-how with financial rigour.
As a result, we can help you with:
- An evidenced and believable cost reduction plan that reflects the true and achievable potential of your business.
- A business plan that takes into account your cash restrictions, and then phases change and associated cash requirements accordingly.
- A detailed financial model that will increase your stakeholders’ belief in the plan and help them to support you.
- PRINCE2 trained project management experts that can deliver high impact programmes.