As PWC emphasised in a report on cost reduction, “the CFO’s agenda has inverted from control at all costs to absolute cost control.” In the process of repositioning the company's finances, the CFO should take the initiative and play a leadership role. But how can they, in their capacity as a leader of the finance function, serve as the compass that guides the business towards a more lucrative future?
Our Business Trends Report emphasises that the cost-of-living crisis and stagnant UK economy presents businesses with real difficulties. 78% of respondents are worried that economic circumstances will influence their organisation's profitability during the next 12 months. As they strive for development and improved earnings, there is an immediate need to limit this risk by making systems more “bulletproof”.
Why should you employ a cost reduction strategy?
To combat the uncertainty around financial industry trends (caused by persistent inflation, disruptions in supply chains, and a tight labour market) many core leaders will need to make expenditure trade-offs. But even organised programmes intended to maximise cost strategies may be undermined by several cost reduction process mistakes.
Suppose high inflation continues or rising interest rates affect the demand side of the economy. In that case, an increased number of CFOs will begin to search for ways to reduce costs. In addition, leaders need to start planning for where they can find expense savings, while also avoiding typical pitfalls that make it difficult to accomplish long-term development aspirations.
Digital systems can help CFOs to plan effectively and ensure the right cost-reduction strategies are being incorporated. Our Trends Report highlighted that 94% of business executives believe technology is essential or very important for bolstering profitability, and 47% believe it allows people to operate remotely. This goes to show that, among the workforce, there’s a clear understanding of central technology should be in the pursuit of cost-cutting.
5 strategies for CFOs to make the right cuts
In a survey about cost control, conducted by specialist financial advisors Grant Thornton, CFOs selected cost efficiency as the most important area of attention (given the economic outlook for the next six months). Cost optimisation, listed by 27% of respondents as their top priority, surpassed vital areas such as liquidity and access to capital among the priorities of finance executives.
There are several cost-reducing strategies that CFOs can implement right now:
1. Enhance spending transparency
Without a doubt, transparency represents a critical component for expenditure control. It allows managers throughout the organisation to completely understand and account for where money is spent. Every business must have repeatable, end-to-end, actionable visibility of spending by expense category, operational processes, and function.
2. Monitor cost drivers
In all instances, fundamental and underlying causes of a company's expenses need to be identified, which requires a robust, detailed, trackable procedure. Everyday business decisions, like choosing suppliers or finding quick ways to cut costs, rely on this kind of expenditure information.
3. Diminish consumption
Instead of focusing just on cost reduction, more CFOs should explore consumption reduction, a thorough, periodic evaluation of how money is spent. Such methods may aid in preventing payment for underperforming processes.
4. Adopt cost transformation
The objective of cost transformation is to simplify and refocus the company. It entails a comprehensive review of each business activity and determines whether it should be implemented. Is it something they should handle themselves, or would it make more sense to outsource it? Should they attempt to automate the process? These are questions CFOs should be asking regularly.
5. Shift long-term objectives
CFOs may be more cautious with costly, long-term projects and invest less with this type of strategic initiative (especially when borrowing costs and interest rates increase). Due partly to low-interest rates, several firms have increased their debt levels in recent years as they seek to expand. But with the current increase in interest rates, this is no longer a viable option.
5 mistakes to avoid when making cost reductions in business
Unwittingly raising future costs represents the most detrimental effect emerging from a cost reduction technique. Suppose you are trying to keep your firm viable while also setting it up for future development. In that case, you can be setting yourself up for strategic cost reduction failure in the future. In some cases, reducing certain expenditures now can end up costing you more later. Here are several other cost reduction mistakes to avoid:
1. Making budget cuts with unrealistic targets
The purpose of budget reduction is to decrease corporate expenditures and boost income. Nevertheless, if you establish unachievable cost-reduction goals or make cutbacks without planning arrangements to sustain performance, you may severely disrupt it.
Most cost-cutting strategies are short-term and fail to sustain the behavioural change necessary for continued prudent expenditure choices. For example, even though policy rules may restrict certain costs (such as travel and expenses), budget owners and managers who pursue initiatives to support growth will ultimately incur previously deleted costs. When the next crisis occurs, this leads to another painful round of expense cutbacks.
2. Overlooking innovative technologies
It is vital to keep up with technological innovations and emerging trends to capitalise on growth prospects. You can grow to meet rising customer expectations, fix inefficiencies, and get ahead of the competition with the help of cutting-edge software. Investing in innovative tools for your company could seem like a waste of money at first and it may be difficult initially to get key stakeholders onboard. However, their benefits far outweigh their cost. Profits may rise dramatically, for instance, if automation were used to cut down on overhead expenses, boost output, and reduce human mistakes.
3. Eliminating the wrong expenditures
Occasionally, the benefits of cost-cutting strategies are negated by unintended consequences, such as decreased morale among workers. Hence, not all spend should be eliminated. When doing a cost-benefit analysis, it is sometimes necessary to tailor the numbers to the details of the organisation in question.
Depending on their circumstances, one company may decide to stop paying for unused office space. While another may require these facilities to maintain their corporate culture and employee wellbeing. Carefully consider the impact budget cuts can have on your business and employees before making any sweeping decisions.
4. Laying off capable employees
This is one of the most common mistakes made. Companies could incur excessive long-term expenditures when they lay off workers to reduce their current budget and may find it’s more difficult to later rehire people to fill the positions that were vacated. Businesses often concentrate on lowering headcount, rather than improving the employee experience or enhancing the delivery of products with methods such as:
- Bonuses and advantages
- Corporate culture and team building exercises
- Automation & outsourcing of business processes
- Methods of payment structuring
- Planning time for employees
5. Not implementing KPIs for cost reduction strategies
In many cases, there are no performance benchmarks in place to monitor the implementation of cost-cutting strategies, nor are there incentives tied to the delivery of these methods. Developing key performance indicators (KPIs) around these measures allows for them to be monitored as they occur. When incentives are tied to specific KPIs, employees are typically motivated and challenged to go the extra mile to generate the desired outcomes.
How do you implement a cost reduction strategy?
There are multiple avenues CFOs can take for cost-cutting:
- Substitution - What could you use in its place? When investigating various sorts of cost reductions, you should consider whether assets may be repurposed.
- Combination - In some cases, combining processes, departments, teams, people, or product components might save money.
- Adaptation - There are several company practices that you may imitate. It is possible to reduce expenses by just observing what other businesses or departments are doing.
- Modification - Modifying your employees' holiday policy, for example, could cut costs. You may provide them with a combination of paid and unpaid leave, which they will welcome if they seek a way to take time off without quitting their positions.
- Repurpose - Several items and procedures could be repurposed to save money or earn cash.
- Elimination or turnaround - Many aspects of your company may be discarded or streamlined. For example, some workers may prefer to work remotely, which saves money on office rent / energy bills, furniture, and equipment.
Cost reduction FAQs
What are cost reduction strategies?
Cost reduction maximises a company's earnings by reducing expenditures. It entails reducing non-essential expenses and streamlining processes to increase efficiency.
What is a cost reduction with examples?
Cost reduction is precisely what it sounds like. It allows businesses to reduce expenses and improve their bottom line. How and where firms use this approach might vary based on their goods, services, and available resources. This could involve stocking goods based on demand rather than purchasing the same number of raw materials even during quiet periods.
What are the challenges of cost reduction in the finance department?
Some of the most common challenges of cost reduction in the finance department are unrealistic targets, execution challenges, loss of momentum, and inadvertently hindering business efficiency.
Why should you employ a cost reduction strategy?
Cost-cutting measures keep businesses competitive. The strategies boost operational efficiency so they can maximise their staff and assets.
How do you implement a cost reduction strategy?
Here are some steps you may take to create and execute a cost reduction strategy:
- Evaluate the organisation's long-term strategic objectives
- Consult with staff
- Plan a phased rollout
- Quantify and document the company's savings
- Implement and track your long-term strategy
Why financial software is not the right place to cut costs
Financial software is not the best area for a business to reduce expenditure. While cost reduction is essential, it is not always the best strategy when it comes to financial software. Investing in replacing outdated financial software will increase a company's profitability and simplify its operations.
One of the primary advantages of using sophisticated financial software is that it automates many time-consuming processes, allowing staff to concentrate on more crucial responsibilities. This enhances efficiency and productivity, eventually resulting in higher profitability.
In addition, sophisticated financial software enhances communication among the team, enabling them to exchange information and collaborate on projects more easily. This leads to smoother operations and improved decision-making. Furthermore, financial management software provides insightful statistics that help with strategic analysis and maintain transparency around financial health.
Investing in modern Cloud-based accounting software, like Advanced Financials, increases the finance team’s output, boosts profitability, automates tasks, reduces costly errors, and contributes to overall cost savings.
If you're interested in reducing spend in the right ways, be sure to watch our on demand webinar: How purchasing departments can cut costs strategically with the help of technology.