What areas of an organization are the best places to audit?
Payroll and benefits are typically the largest expenses, and reductions in work force to match associated revenue can result in significant savings. However, before taking this route, many organizations look at other alternatives, such as shortened workweeks, unpaid leaves of absence, temporary salary reductions, or revamping or suspending benefit packages to reduce payroll costs without losing valuable employees. They recognize that the costs, including recruiting and training, to replace an experienced employee when the economy improves may be far greater than the cost to carry the employee on the payroll.
Additionally, companies may not be too quick to hire a replacement for an employee who leaves. Rather, they rethink how work is being performed and look to reallocate the individual’s duties to existing employees.
Another option that shouldn’t be overlooked is outsourcing, which can turn a fixed cost into a variable cost — and it’s the fixed costs that are challenging to cover in a difficult economy. Continued technological advances have made it possible to outsource a wide range of functions, including HR, customer service and IT. For example, software-as-a-service is now a thriving sector, allowing companies to dramatically decrease their IT infrastructure and the internal resources necessary to support it, and gain enhanced customer service and application availability.
Lastly, companies should examine each expense item on the income statement to determine what they can live without. Multiple small-dollar savings, whether attributable to unnecessary subscriptions or services, can result in substantial bottom-line improvements.
How can a business strategically and rationally look at these areas for ways to improve them?
In the simplest terms, business owners need to look at their operations to identify what is adding value. Successful businesses look for ways to streamline their operations and shorten the number of steps in the delivery process. Owners who think in these terms find it easier to determine what costs can be cut without harming the business. The focus is on serving the customer in the most efficient and cost-effective manner.
What mistakes do businesses make when trying to manage costs?
One of the fundamental mistakes that businesses make is failing to recognize that, in order to improve, change is inevitable. Tom Peters, who is often referred to as the father of branding, said, ‘Excellent firms don’t believe in excellence, only in constant improvement and constant change.’ Leaders of organizations must embrace change and not allow those who oppose change to derail the organization’s goals and objectives. If the tone at the top of an organization does not support an initiative, then the initiative is doomed to fail.
Business owners who are successful surround themselves with the brightest people and solicit their input.
Mark G. Metzler, CPA, is a director at Kreischer Miller. Reach him at (215) 441-4600 or [email protected].