Balance cost management like a pro, even in the toughest of times.
It’s never ideal. A last resort. Despite the fact your blood, sweat and tears have been poured into good management and tight spend efficiency, the mandate has come down and you’re stuck between a rock and a hard place–cost-cutting priorities are necessary, and non-negotiable.
How do you balance cost-cutting mandates, mitigate risk and support people through difficult change? Because the truth is, you’re working to achieve all three–and so much more–simultaneously.
It’s okay. Breathe, refresh and remind yourself:
- You’re not alone, these things happen. Especially when external influences meet internal pressure.
- There are ways to manage this situation and minimize the impacts for everyone involved.
First and foremost, it’s essential to understand that while this is far from an ideal situation to land in, you are where you are. But being informed and prepared can make a world of difference in getting the job done, decreasing disruption and supporting those around you.
So, let’s begin by breaking down some cost management basics. Then, roll up your sleeves for 15 practical tips you can apply to start cutting costs today.
Where Does Cost Cutting Fit into Cost Management?
The first step to effectively cutting costs within your overall cost management strategy is to define cost management. You’ll then differentiate between some of the most prevalent cost management tools strong leaders turn to and decipher where each fits into your current circumstances.
Let’s start with a quick refresher. Cost management embodies a range of strategies to identify cost minimization opportunities and implement savings measures. It’s used to control and optimize ongoing operational expenses, but also involves monitoring and evaluating the efficacy of the cost saving initiatives. Rule of thumb: good cost management strategies do not negatively impact quality production or processes.
The most common cost management terms are often mistakenly used interchangeably, causing miscommunication and clarity issues. What are the differences?
The most immediate cost management strategy, cutting costs prioritizes organizational expenditure slashing to improve profitability. These acts are typically implemented during economic downturn or when companies are at risk of financial distress.
Common cost cutting examples (warning, they can be painful):
- Reduce inventory, such as implementing just-in-time (JIT) inventory – receiving and stocking inventory only when it’s needed for production or filling orders.
- Downsizing, including consolidating departments, eliminating redundant positions or selling off buildings/worksites.
- Layoffs. Using performance evaluations, skills match or seniority to determine who must stay, and unfortunately, who you must let go for now.
It’s critical to avoid over-cutting costs, which puts your company at risk should demand increase or more costs be incurred unexpectedly.
To balance cost management, strategies that cut costs are complemented, supported or avoided with more proactive tactics such as cost reduction and cost avoidance measures that help maintain financial health and the competitive edge.
Cost reduction targets a tangible, shorter-term decrease in the costs of doing business for maximized profits, ideally with lasting impact. Cost reduction strategies target “hard savings” such as costs associated with acquiring goods and services from external contracted sources. These expenses directly impact your company’s bottom line. Unlike cost cutting, cost reduction is about lowering, not entirely eliminating, costs.
Common cost reduction examples (good news, they’re much less painful!):
- Identify and eliminate bottlenecks, redundant activities and workflow inefficiencies.
- Implement energy-efficient equipment, technologies and procedures to reduce utility costs.
- Consolidate purchases and negotiate agreements that leverage buying power with volume or quickpay discounts.
Cost reduction enhances your organization’s ability to invest into new areas and ultimately supports future growth.
The preemptive actions you put in place to reduce or prevent incurring unnecessary future costs fall under the cost avoidance arm of cost management. Also referred to as “soft savings,” these efforts are not reflected on the balance sheet and don’t impact the EBITDA since they avoid future spending.
Common cost avoidance examples (easier on the nervous system!):
- Schedule regular preventative maintenance of equipment and machinery to identify and address potential issues before they escalate into major problems including costly repairs and downtime.
- Invest in training and development programs for your employees to enhance skills, communicate procedures and support efficient job performance while avoiding costly errors and rework.
- Implement comprehensive risk management practices such as obtaining appropriate insurance coverage or enforcing cybersecurity protocols that prevent security breaches.
Despite not showing up on today’s financial reporting, successful cost avoidance is a cost management strategy where the payback compounds over time. Track your efforts and results to be sure you get credit where credit is due once they’ve clearly made a difference!
This is important, so let’s recap all three:
The combined financial benefits and monetary value of cutting, reducing and avoiding costs fall under the cost savings umbrella.
There’s nothing like a good formula, so here’s a simple calculation:
(Prior Expenditure) – (Cut Costs + Reduced Costs + Avoided Costs) = Cost Savings
By reducing expenses and increasing profitability, cost savings improve your company’s financial position and protect your operational continuity.
Now, let’s dive into those practical tips. You can apply them to your cost management strategy today and ease the situation when directives to cut costs come down.
Savvy Saving: 15 Tips for Mastering Cost Management & Softening the Cost Slash Blow
- Renegotiate volume discounts. Analyze major areas of regularly occurring spend and find ways to negotiate better rates with your largest suppliers and services. For instance, do employees often travel and use the same hotel chain or car rental company? If so, you’re in a good position to secure discounts that add up while requiring little effort to win.
ProTip: Maximize this cost-cutting measure with a cross-departmental sweep to gain even larger savings and strengthen your bargaining power. There’s value in numbers here.
- Institute a temporary pay cut. It might sound severe, but a temporary pay cut across the board–including top management–can save significant amounts of money without resulting in job losses.
ProTip: This measure should be communicated openly and delicately. Explain that it's a way to prevent layoffs, save jobs and ensure the company's survival.
- Don’t miss the small costs. Perform an audit on all software and other subscriptions to determine what’s actually being used. Can you eliminate SaaS subscriptions that are costing more than their value output?
ProTip: Ask employees to contribute their insights for a collaborative approach to trimming small-cost spend. You never know what you might uncover. Ask for a company-wide effort: where can your organization hold down pay increases, temporarily stop spending on team activities, reduce travel and save on promotional customer-facing expenses?
- Conduct value analysis. Cross-check company-wide specifications, materials and processes to uncover opportunities to cut costs. Collaborate with engineering and technical teams to find alternative materials, designs or methods that still meet requirements but also lower expenses.
ProTip: Set standardized specifications for the most common materials and procedures that factor into your business’s production. Shortlist your strongest options for goods and services providers to streamline your supply chain and establish closer relationships. This sets the table for negotiating better prices and reducing complexities without compromising quality.
- Centralize information. When people can’t access the information they need, right when they need it, time and money are wasted. If employees push ahead without the right information, costly rework projects become the norm. Information must flow vertically and laterally for maximum efficiency.
ProTip: Even something as simple as regularly scheduled meetings can boost communication and information flow for increased productivity. Add a centralized and digitized information sharing system, and efficiency spikes exponentially.
- Consolidate roles and responsibilities. Review your organizational chart and identify any roles that can be consolidated.
ProTip: Cross-train employees to uncover opportunities where one person might handle multiple roles. Cutting costs and bolstering team skills diversity add up to a long-term win.
- Promote work-from-home opportunities. Are there roles within your company where people may not need to work in the office full-time? Whether you go completely remote or create a hybrid work policy, scaling back on office space and resources cuts costs at the same time worker satisfaction is often boosted.
ProTip: Turn to remote and virtual work scenarios and eliminate several non-essential expenses, such as:
- Business travel
- Company perks
- Office supplies
- Other discretionary expenses
Transitioning to virtual meetings instead of in-person events and travel is a major cost cutter.
- Eliminate inefficient administrative expenses. Examine current processes and identify areas to cut costs. For instance, could a coordinator position created as a go-between for departments in the same building or worksite be eliminated by centralizing and digitizing information? Even a simple process standardization policy can eliminate inefficient steps and unnecessary activity.
ProTip: Automate repetitive admin tasks along with hazardous work activities to cut labor expenses and optimize health and safety costs.
- Stop cross-functional duplication. Check in with other departments to identify overlaps, crossovers and repetitions in work areas that if combined, could slash costs. Examples of overlap you may uncover include training programs, events or processes.
ProTip: Take the effort behind this strategy as an opportunity to be more collaborative with your own team as well as across other departments. By creating a single, coordinated strategy session, or naming one department responsible for the task, you will free up time and money.
- Create benchmarks and conduct regular performance reviews. Where are costs overriding output performance value? To manage this, you must measure execution and results. Take a detailed analysis to find areas where even a portion of one full-time-equivalent position can be saved. Then, you can redistribute essential tasks amongst your smaller team.
ProTip: Cutting back on bodies or hours is not an easy strategy to move forward with. But boosting performance and transparency immediately impacts the company’s bottom line in hard times. Having black and white numbers to back the decision can help separate emotion from logic. And, remember to reward those with strong metrics to uplift team morale through this tough time.
- Increase energy efficiency. Explore opportunities to reduce energy consumption and promote sustainability initiatives across your organization. Examples may include installing motion sensor lights and push taps in restrooms or break rooms and turning off unnecessary equipment like computers or air conditioners after work.
ProTip: Engage in energy audits, implement energy-saving innovations and explore renewable energy options that reduce operational costs for the long-term. Elevate this strategy by researching government grants and rebates for greener operations.
- Find optimal outsourcing opportunities. Evaluate the potential benefits of outsourcing non-core or highly skilled activities and form strategic partnerships in these areas. Leverage the expertise and economies of scale within specialized service providers that spread wider productivity at a lower cost.
ProTip: To maximize this cost-cutting strategy, it’s critical to apply it in the areas where outsourcing won’t compromise quality or control, such as within indirect spend categories like professional services, security or human resources.
- Gauge optimal inventory holdings. Implement stronger inventory management techniques such as demand forecasting or storage improvements to reduce carrying costs and boost cash flow. Analyze demand patterns, lead times and supplier reliability to determine ideal inventory order timing and levels.
ProTip: Calculate your ideal buffer inventory, aka safety stock, to eliminate excess. These terms refer to the excess materials and product kept on hand in case of an emergency or supply chain challenge. Your optimal safety stock amount depends on the following for each stock keeping unit (SKU): average daily usage; average daily lead time; maximum daily usage; and, maximum lead time.
A simple formula you can use to determine this for each essential product:
(Maximum Daily Use X Maximum Lead Time) – (Average Daily Use X Average Lead Time) = Safety Stock Number
- Train and develop your people. Training is not an expense. It’s an essential investment. Not only does it enhance skills, educational and orientation programs solidify employee understanding of–and respect for–company policies. A well-informed workforce will better meet or exceed your expectations by knowing how you measure success.
ProTip: Maximize the ROI on training and employee programs by combining them with other events such as company celebrations to save on resources and optimize schedules.
- Re-propose rejected cost-saving ideas. While cost-cutting mandates may come down fast and hard, it’s likely you’ve previously proposed cost saving opportunities that were turned away. Perhaps now is the right time for them to make a difference. Overview previous budget cycles and brainstorm with your team to resurface those initiatives.
Pro-Tip: If you’re tightening your belt, best believe other department heads are trying to as well. Do yourself, and them, a favor by collaborating on previous and current cost management ideas. You might also discover ways to reduce cross-departmental burdens you’ve been unknowingly placing upon one another and eliminate them.
Finding Your Balance on the Cost Management Tightrope
There are several confluent factors taking place right now that mean finding the delicate balance between cost cutting, reduction and avoidance for overall savings is critical. Business leaders face challenges in every direction: economic uncertainty, supply chain instability, greater market competition, regulatory and policy changes, it’s a constantly evolving situation.
A strong and balanced cost management strategy safeguards your business in numerous ways, including:
- A competitive advantage in pricing, products and services for better market share.
- Optimized expenses for improved profit margins and enhanced financial health.
- Environmental regulation compliance with investment into energy-efficient technologies and waste reduction.
- Resilient diversified goods and services suppliers for reliable and cost-effective alternative providers.
- Mitigated risks associated with supplier bankruptcies, geopolitical tensions, trade policy changes and other unforeseen events.
- Agile adaptation to changing economic policies such as tax reforms, tariffs and trade agreements.
In differentiating between various cost management tactics and allocating them accordingly, you reinforce your company’s ability to weather forever-changing economic, regulatory and social environments. Improved profitability, compliance and supply chain resilience position your company to adapt to evolving policies and conditions with agility for long-term sustainability in our rapidly changing world.
Let’s sum up some best practice take-aways when it comes to saving money:
- Align cost management strategies with your organization’s long-term goals.
- More tools reduce risk. It’s highly unlikely one solution is going to revamp your company’s cost structure and profitability. Spreading measures out across multiple areas can lessen the impact for those navigating change.
- Consider organizational disruption in your strategic plans. Unfortunately, the math hurts here. The ratio of disruption to cost-cutting results tends to be proportionate. The larger the savings percentage realized, typically, the larger the disruption. This is why working up a robust plan is so important.
- Communicate your objectives clearly to all potentially impacted parties. Early employee involvement and engagement helps maintain morale. Furthermore, employees may contribute ideas where costs can be further reduced.
- Measure and record your cost reductions and savings results. This can help you make agile adjustments where needed, but also inform future cost management strategies.
Desperate Times, Hopeful Measures
In the perfect world, measures to cut costs would be avoided at all costs. But in reality, there are times they’re simply inevitable. Maybe it’s the direct and immediate goal to improve profitability. It could be a fundraising initiative to tighten up one area and free up costs for a new endeavor such as a vertical expansion or implementing a new technology. It may plainly add up to maintaining a foothold in a competitive industry.
Whatever the reason, at some point in time, cost-cutting directives are bound to hit your desk. So, adopting a responsible approach to cost management is imperative. Preparation and planning are your strongest defense against succumbing to drastic cost measures when times are tough.
As you work to decipher how specific cost management strategies align with your overarching organizational goals, weigh out their potential impact on production quality, supplier and service vendor relationships and ultimately, the longevity of your operation. Any cost-cutting measures you take should be executed knowing you have an adaptable back up plan to respond accordingly should business turn around more quickly than expected and production demand increase.
Fuel Your Cost Management Success with PayShepherd
Today’s fiercely competitive global economy means the margin for cost and value leakage errors is razor-thin. Staying on top of cost management requires both a bird’s-eye view and high granularity spend insights that empower you to pinpoint and rectify inefficiencies.
Are you ready to take control and drive sustainable profitability while maintaining strong stakeholder relationships?
PayShepherd is the vendor relationship management platform that empowers business leaders to connect key cost-saving departments and optimize processes with ease. Our automated spend tracking and reporting, combined with customized dashboard views, spend alerts and powerful data analytics put you in the driver’s seat of informed decision-making.
Don't let saving opportunities slip through the cracks. Unlock critical cost savings with PayShepherd.
Let’s start the conversation that transforms your bottom line, together and today.