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Managing your costs

WITH the current level of economic uncertainty and negativity, a growing number of companies is announcing significant cost reduction schemes, leading many business leaders to question the sustainability of their organisations’ cost positions.

The key to managing through downturns is not necessarily a wholesale reduction in fixed labour resource, much of which often finds its way back into the cost model over time, but the alignment of the firm’s fixed and variable cost configuration with its revenue characteristics.

Also, if costs have to be taken out, it’s vital that those costs have a minimal impact on customer value, so as not to undermine the firm’s competitive position in the marketplace.

So, we have two key imperatives and one useful idea. Firstly, rather than crudely cutting costs, seek to “variablise” your cost structure. This approach is critical for organisations of all sizes. In essence, it involves a detailed analysis of your cost lines with a view to re-configuring those fixed to variable, wherever feasible. As a result, you should lower your operating cost position but not lose critical talent and experience, which will be vital for growth.

The easiest target is labour, but often contract resourcing, rentals, outsourcing and re-engineering efforts can free up the burden of fixed cost commitments. This process may reduce your margins in buoyant market conditions because you will have less operating leverage, but it will work to protect your margins in downturns.

Secondly, take costs out of those product and service features that are not valued by customers. If the firm has ever undertaken a conjoint analysis of its product and service offering, or seriously queried customers about the features of the firm’s offer that they truly value, then this imperative will be achievable.

This is the key to smart cost reduction and, as trading conditions pick up, volume improvements will result in aggregate margin performances taking off.

Finally, as an idea, make your capital work harder and you will save cash. A focus on capital efficiency will always preserve precious working capital and keep financing costs under control during a downturn.

Also, think through your capital expenditure program with a view to not sacrificing key projects, but timing their rollout so as to stabilise your cash position for the short to medium term.

These are all challenging ideas, and should be undertaken with a level of scrutiny and diligence, possibly under the guidance of a board or senior executive sub-committee. They are, however, vitally important to ensuring that your business model is robust when economic conditions and expectations improve.

Remember, cost management needs to be as solid during more buoyant times as it is now. Ideally you just should be tweaking the focus.

Large scale and indiscriminate cost reduction programs more than likely signal that you either weren’t managing costs in the first place, or that events have caught you completely unaware. Few businesses will get away with that excuse more than once.

The writer can be contacted at anthony.wooles@trudo.com.au or through the office at Business News.

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