When the bottom line margin gets thin, there’s really only a few options to bring it back in line. Increase revenue (potentially through expansion, volume, or price increases) while holding or concurrently reducing expenses (inventory costs, reducing product size, overhead) or doing the reverse, reduce expenses while holding or increasing the revenue level. Obviously, our job is not to throw our hands up in despair but to bring things back into alignment.
Embed Acting Like an Owner into Your Company Culture
‘Act like an owner’ can and should be the first line uttered at every employee orientation. Teaching and ensuring that managers and staff members keep that thought in mind daily as they make decisions to manage their expenses is a perpetual activity.
Active Expense Management
Annual budgeting time shouldn’t be the only time that numbers are looked at. We don’t believe much in surprises in the financial and accounting worlds and being surprised or just not knowing the cost and ROI or expenses won’t contribute to keeping businesses viable. While you don’t want to overwhelm the team with the details we dig into, it’s a good practice for the team to know your disposition at a high level and what’s driving a cost-saving measure. You’ll get their buy-in and avoid concern about being condescending to them.
Encouraging your management team to dig into the details could reveal something as simple as noticing that shipping costs attached to over-sized boxes used for a group of products shipped (that were bought at a lower cost than the smaller boxes) completely consumes the savings from the cost of the box when the shipping costs are tripled due to hitting a pricing threshold. Changing that for a high-volume product could reap significant savings.
Expense Budgeting: In Depth Review
Across-the-board cost cuts by 5, 10 or 15% aren’t usually the smart way to go. As this McKinsey article points out, if you don’t differentiate between the costs that add value to your bottom line and those that don’t, you could hurt your top line rather than rescuing the margin. Whether its funding a marketing campaign toward a new audience or opening a new location, actively making conscious choices about where your spending dollars go is the key to lowering expenses in the right area. If team members in shipping don’t get why boatloads of company-branded pens are coming in while (already paid for) printers that live on expensive toner are going out, encouraging that conversation to come to the surface will only help with an active expense budgeting campaign.
Driver-Based Planning: Use the Right Drivers
As financial leaders, we know it’s not about the numbers. It’s about what the numbers mean. Today we’re able to continually tweak what-if scenarios much more easily than we could in the past. It’s always useful to look back at the actuals but looking forward is where it really counts. Defining and going after the right drivers that contribute to your costs in specific areas is so useful here. If the drivers you’ve set up in your budget don’t truly move the needle, then you’ll need to look at what really is driving the costs.
Manage Your Metrics
Operational metrics are revealing and being transparent with your team about where their costs are compared with industry standards will also encourage evaluation of where they likely should be. One caveat though is that sometimes teams see the industry standards as the goal rather than the really thinking informatively on how they could capture the gold by coming in well below the standard. Best-in-class comparisons can be useful here.
The other point about metrics is that it’s so easy to get carried away with them. Figuring out the ones that matter is again the key. Tracking costs per unit of a low volume, low margin may not be worth the effort. It’s certainly doable but discretion comes in here as well and educating the management team to inform their decisions with a great deal of judgment could be necessary.
Pick a few cost drivers in a unit or project and challenge your team to take some time daily to brainstorm and come up with ideas to lower the cost. Celebrate and implement any that flesh out into real savings.
Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planning, financial forecasting, financial consolidation and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.