5% Today – 10% Tomorrow! Where Does It Stop?

5% Today – 10% Tomorrow! Where Does It Stop?

An instruction has been brought down from higher management that you must find ways to reduce cost; for you to implement a budget cut of 5 to 10 percent or even higher. Yet, you don’t even know where to start. Does this sound familiar? Cost-reduction demands happen to everyone and everywhere. The advice we offer in this post may not solve your problems entirely, but it will help you get started.

Companies decide to implement administrative cuts due to a lot of reasons, like protecting profits, removing redundancies after an acquisition, or to avoid bankruptcy. There are many more possible reasons, but the most important question in your mind right now probably is “Am I cutting enough?” This question cannot be answered directly but should be looked at a different angle.

First is to establish what overhead expense is for.

  • It sustains daily activities. They are expenses that allow the company to pay staff salaries, rent, utilities and more. Once you’ve determined this, you can now compare it to the cost of your product and service and how many percent of the profit goes to overhead expenses, e.g. 20% of net sales. Next is to look at your direct competitors and check if they have similar values. If your product of service bears more overhead expense, it results to higher cost and makes it less competitive in price. Is the higher cost justified?
  • It increases effectiveness. Assess if your overhead expense really does increase effectiveness as compared to cutting the cost but results in a lower standard of efficiency. Is the increased effectiveness worth it? Is it profitable or at the least, self-liquidating? List down the things that fall under overhead cost and rank them according to effectiveness, and should it come down to it, you can draw the cut off line. This can also be used in qualifying staff positions, need and capacity.
  • It is a foundation for company growth. Some overhead costs are used for product and service developments that may lead to increased revenue in the future. These investment costs should be evaluated based on net-present-value to see if the expense is justifiable.

After you’ve established the reasons for your expenses, the next step is to find out what you should focus on saving. Keep in mind that it is highly difficult or almost impossible to come up with the one grand idea that would radically change the cost structure of your company. What you need is to create a number of milestones or smaller tasks that will help you reach your target. It is also important to note that cost reduction has its repercussions; one action has an equivalent reaction. It can significantly disrupt the normal functioning of your organization. Hence, planning your reduction should consider how to keep impact at a minimal level through incremental ideas, to reduce cost of up to 10 percent. Reducing costs at higher percentages is proportional to higher disruption level. Product redesign or staff reorganization may reduce expenses up to 20%, while department or program elimination can go as high as 30% in savings.

An incremental change to cut costs in the least disruptive and it doesn’t affect the way you function with other departments. And a 10 percent cost reduction is fairly decent and more achievable. Below are some budget cut ideas that you can apply:

1. Reduce incidental costs such as holiday parties and other similar activities. If you have already eliminated most of them in the past, then combine what’s left. Consolidate parties across departments, even trainings and seminars.

2. Manage miscellaneous expenses. This can include office supplies, or various office equipment and accessories. You can always search for ways to eliminate unnecessary spending even by around 20%. Add a control measure, such as approval is needed for stationary or supplies cost that go beyond a certain limit.

3. Review supervisory roles. Some departments acquire unnecessary spending because of supervisory levels that they don’t really need. If they are performing the same tasks as the previous years, they might not need the same level of supervision. This doesn’t necessarily mean removing the supervisors, but rather giving them other tasks that they can contribute.

4. Reduce pay increase percentage. This idea might bring about employee complaints, but should the need really arise, you can check with the department heads if the employee performance deserves the same percentage of increase as last year. Also consult your HR if the rates are the same across the marketplace. You can consider reducing the pay increase by one percent or two compared to last year.

5. Take personnel actions. Every company has underperforming personnel. If you have tried saving costs by filling the vacant positions yet still need to cut off some more, then job restructuring might come into play. There are two basic kinds on underperformers: employees who are unproductive because they weren’t given enough responsibilities, and employees who focus on doing tasks that are more satisfying but are not valuable to the company. An example of the second kind is sales people who focus on meeting with existing customers rather than calling on and selling to new prospects. Eventually you will have to take on the undesirable task of firing the under-performers. Firing them sooner will give them a better chance of finding a new job than firing them two or more years later.

6. Bring up previous cost-saving ideas that were rejected. They might have been rejected in the previous years because they were not a priority at that time. But if you think the required investment is minimal, yet it would increase your productivity, maybe now is the best time to propose it again. This could include upgrading your IT system.

Budget cuts come in many forms: downsizing, layoff, cutback, restructuring, and more. To managers, they usually just mean stress. Budget cuts are among the most difficult decisions to make. When given this kind of task, you need to consider all the possibilities and not always focus on staff reduction. Do not merely react to imposed budget, but rather look at how you can positively respond to real needs.

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