Companies are tightening their belts,
trimming the fat and squeezing operations. Businesses are engaging in cost
analysis at all levels, putting their budgets
under the microscope as they determine
what resources must be redistributed or reinforced to weather the economic storm.
“These times are tough, but companies that
review their cost structure and revenue
sources will come out of the downturn in a
much stronger position,” says Bill Willbrand,
member, tax and accounting, Brown Smith
Wallace LLC.
“It’s a time of concern, but also of great
opportunity,” says Ted Flom, member and co-leader of the risk services practice at Brown
Smith Wallace LLC.
A careful review of costs includes evaluating key areas of the business such as customers, margins, contracts and leases, health
insurance and travel. Willbrand suggests a
“clean piece of paper” approach to budgeting
to determine a company’s real value stream
and isolate waste that can be cut from the
organization.
Smart Business spoke with Flom and
Willbrand, who shared cost control and
reduction strategies that companies should
implement today.
How can a customer analysis shed light on
cost inefficiencies?
A careful review of customers can unearth
opportunities to improve profitability and
mitigate risk. Evaluate direct and indirect
customers of your products and services —
including your customers’ clients. Their
financial health can affect your business. For
instance, if you do not directly serve the
building industry, but you supply a product to
a company that sells into the housing market,
you can expect its financial stresses to trickle down to your organization. Also, examine
your customer base and identify those that
are unprofitable or those with low margins.
You may decide to renegotiate pricing with
these clients, or you may be able to use this
information as leverage to demand other
concessions such as quicker payment terms.
Lastly, look for clients who are notoriously
behind in payments. These clients are treating your business like a bank. The longer
receivables string out, the less likely you are
to collect on them.
How can companies find opportunities to cut
costs by evaluating profit margins on products and services?
In this economy, companies should evaluate profit margins on products and services
to identify those that are selling for low margins or at a loss. Consider the labor and raw
materials invested in producing these products and services along with other costs,
such as warehousing and packaging. If you
can focus your efforts on products and services that sell at margins that support your
business, you will be able to improve the
company’s overall profitability.
What cost savings can be realized through
analyzing contracts and leases and renegotiating where possible?
Companies need to get a handle on their
most significant vendor relationships, which
often include leases. Review contracts with
your most significant vendors and be sure
you are receiving all promised discounts or
rebates. Read the fine print and hold vendors
to these agreements. You may be receiving
charges that are not consistent with the
terms of the agreement. For leases, common
area maintenance (CAM) expenses are often
a source of inappropriate charges. If you feel
your contracts or leases might present
opportunities, consider conducting an audit.
As you review vendors’ contracts, you may recognize opportunities to reduce the number of vendors and realize economies of scale
by giving more business to a single vendor.
Also, revisit contracts with existing vendors
and ask about renegotiating pricing and
other key terms. Today, vendors really want
to keep your business, and they may be willing to offer discounts and incentives or adjust
payment terms. Don’t be afraid to shop
around. Being smart about your contracts is
one way companies can quickly and easily
impact the bottom line.
What can be done to reduce health costs?
Businesses are having a difficult time managing health insurance costs, which continue
to increase. Review plan design and the premium you ask employees to pay. Health
insurance is a valued benefit, so you should
help employees understand how much premiums actually cost. Companies today are
asking employees to take on more of these
costs. You should also check into lower cost
plans, such as health savings accounts bundled with high-deductible health plans.
Finally, if your company is self-insured, enlist
a third party to audit the plan administrator
to identify cost savings, such as participants
enrolled in the plan who are not eligible and
claims that are not being handled properly.
How can companies trim travel expenses
without hurting client relationships or new
business development?
Companies are finding opportunities to
reduce travel costs by tightening their policies, renegotiating arrangements with travel
partners and by enabling employees to utilize
technology. Tighten your travel policies to
make employees be more prudent with their
travel expenses. In this economic climate,
there are also opportunities to negotiate better deals with air carriers, hotels and car companies. In addition, some companies are asking employees to reduce the number of trips
they take and to make greater use of existing
technologies such as conference calling and
Internet-based application sharing tools like
WebEx.
TED FLOM is a member and co-leader of the risk services practice at Brown Smith Wallace LLC. Reach him at (314) 983-1294 or
[email protected]. BILL WILLBRAND is a tax and accounting member of Brown Smith Wallace LLC. Reach him at (636) 754-0200
or [email protected].
