Cost optimization: plan, activities

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Optimization of costs at the enterprise is a necessary and important step in an economically unstable situation. Consider it in detail.

Key Questions

To do everything right and not become a "tyrant and satrap" in the eyes of the staff, you need to understand:

• existing types and cost reduction options;
• principles and methods of planning accompanying cost optimization activities;
• the most effective ways to reduce costs from a practical point of view;
• how to reduce material costs;
• essence of benefits from reduced transport costs;
• how to choose a cost reduction strategy;
• basic optimization principles.

Budget

They often try to shift budgeting to a department whose employees believe that they are not fully competent in this matter. However, budgeting is an important step. Participation in it allows you to get a large amount of information that is important for all departments.

The budget is formed in several stages:

• formation of a project plan for the future budget;
• consideration of the draft budget;
• budget approval;
• budget execution;
• execution analysis.

Optimization of budget spending is the next step after budgeting.

Costs

Optimization of costs is impossible without understanding the content of the term "costs".

They are those funds that are involved in the formation of profit for a certain period. Part of the costs accumulates in the form of finished products, semi-finished products, intangible assets or construction in progress in the company's assets. The diagram shows a simplified structure that complies with IFRS standards.

Simply put, an expense is an increase in liabilities or a decrease in assets that results in a decrease in capital.

Optimization

It is believed that cost optimization begins with cutting costs at the current moment. However, this is not entirely true.

Optimization of budget expenditures at the enterprise does not begin at the moment when they begin to strictly control the spending of money that is already in the account. Unfortunately, at this moment the question of where the money in the account comes from is not controlled at all. Attracting active lending, as well as managing only expenses, entails a chronic shortage of funds in the enterprise, and then - possible bankruptcy.

The effectiveness of this procedure depends on keeping records of both income and expenses. These items need to be planned, and management must constantly monitor the numbers by year, quarter, month or other financial period. Is alwaysthere is a possibility that currently costly projects will be very profitable in the long run.

Work areas

Optimizing costs does not mean taking actions to the detriment of business interests. The task of reducing costs must be solved in an optimal way, when comparing expenses and income with each other.

You can solve the issue in several directions:

1. Cost reduction through internal resources (direct reduction). These actions include increasing productivity, reducing material costs, reducing management costs, as well as reducing the staff of the enterprise.
2. Decrease in production costs (relative reduction). This can be achieved by increasing the volume of production. In this case, much less money will be spent on one part.
3. Formation of an offer through marketing research. In this case, the growth in the volume of purchases by customers is stimulated and an influx of new customers is formed.
4. Formation of strict financial discipline. In this variant, a limited circle of people can give “go-ahead” for expenses.

The budget spending optimization program should cover the narrowest areas. Then it will be as effective as possible.

Optimization paths

A cost optimization plan can include three directions in which a company can go.

Highlights express reduction, enterprise cost reduction at a rapid pace, systematicabbreviations.

Each of the methods is used in a specific situation. The measures applied in this case should be in line with the current state of affairs and should also be based on long-term planning.

Express reduction

Choosing this method to reduce costs, it is urgent to stop paying expenses on some items. To determine the result, you need to find out the likely consequences of each optimization method.

All costs are divided into:

• High priority. Such expenses are necessary for the enterprise to continue its activities. These include the payment of wages to employees, the purchase of raw materials for production.
• Priority. This is the cost of paying for mobile communications, advertising. If you stop paying under this article, then the work of the company will fail.
• Permissible. These include benefits for employees, payment for sanatorium treatment for staff. If the company does not have free funds, then these payments can be suspended, but it is preferable to keep them.
• Unnecessary. An example of such costs is the payment of a private flight for the head of the company. The cancellation of such expenses will not adversely affect the company's operations.

When choosing an express cost reduction, first of all, payments for an “unnecessary” item are stopped and the allowable ones are sharply limited. It is not advisable to reduce the first two categories.

Rapid cost reduction

Optimization of costs in the enterprise at a rapid pace is possible as a result ofa number of events. To cut costs as effectively as possible, management must determine where they save first.

1. Save on materials for production and raw materials. Ways to optimize costs can be different. Revising contracts with suppliers in order to obtain goods at a favorable price is the most effective way to reduce costs. Also, suppliers can offer payment deferrals, which will give the company the opportunity to raise the necessary amount without obtaining additional loans.
2. Analysis of transport costs and optimization of this item of expenditure. In addition, you can reduce the cost of electricity, telecommunications. The transport department can be outsourced, and then contact the logistics center, which will draw up a program to reduce transport costs. To reduce the cost of electricity, control its consumption, monitor the level of illumination in the dark, install energy-saving equipment. Reducing the list of employees who are en titled to corporate mobile communications will significantly reduce costs. You can negotiate with a mobile operator or a telecommunications service provider to conclude a corporate contract with favorable terms.
3. Staff cuts and payroll reduction. Outsourcing and freelancing effectively reduce the cost of paying salaries to staff, and recruiting companies or an internal recruitment department will help replace inefficient employees. For example, it is not necessary to have a cleaning lady on staff. outsourced maintenance staffwill save up to 20% of payments attributable to each employee.

Another option is to optimize costs by reducing wages, but providing social benefits: expanding the list of medical insurance conditions, providing employees with food at the expense of the company or free coffee in the machine. Studies show that the investment in this case will be profitable in the long run, as it will increase staff loy alty.

Systematic abbreviations

As the name of this optimization method implies, its essence is to carry out periodic activities aimed at reducing costs.

1. Investment management. Long-term investments should always be carefully justified. In order for a company to purchase new, more efficient equipment, the department concerned must argue what will be the benefit for the company when the project pays off, when it starts to bring profit. The introduction of new competitive technologies helps business development. However, when making a decision to buy something, management must keep the main goal in mind - cost reduction.
2. Procurement management. It consists in periodically looking for new suppliers that provide quality goods at better prices.
3. Business process management. "Sudden management", so inherent in our country, greatly affects the principles of doing business. From the point of view of new methods, when organizing business processes, it is proposed to look at production from the side of the buyer. Conduct a process analysis. The manager of the enterprise needs to ask himself, will the buyer pay for this? The client will not want to pay for the movement of goods, downtime, re-equipment of production without changes that improve the product. Therefore, such expenses should either be reduced as much as possible, or completely eliminated.

Optimization rules

When compiling an action plan to optimize costs, it must be remembered that a situational solution to a problem is not always the best choice. Reducing costs is a chore that should become a good habit every day.

Following the rules of optimization, you can achieve the maximum effect with the least loss.

1. Costs do not always need to be reduced, more often they need to be managed effectively. Sometimes, in order to reduce overall costs, you need to increase the amount of costs in some particular direction.
2. Costs are kept to a minimum to achieve the best result. The efficiency rule says that one cost unit must necessarily provide the maximum result.
3. There are always costs, whether it be action or inaction.
4. There are no small things when it comes to spending. Let the employees of the company be angry about the report on the use of the third dozen pens in a month. But once they get used to paying attention to the little things, they may see an increase in salary or better working conditions as a result.
5. Striving to keep costs as low as possible is not always helpful. It may be optimal to reduce costs slightly and keep them on track.required level.
6. Optimization of budget spending is impossible without financial investments.
7. There is a type of spending that allows you to avoid even greater losses. These include insurance, hiring security guards, installing alarms, and improving product quality.
8. All employees of the company should be included in the process, but everyone should have their own, important task for them.
9. Caution is never too much. A thought or a hunch that arises as a result of reading a report leads to a deeper analysis of the indicators and almost always leads to a reduction in costs.
10. Cost optimization should be done constantly. New items of expenditure affect the company's profit. Appearing suddenly and suddenly disappearing unnoticed, they can cause significant damage to the company's budget. Tracking expenses should be a mandatory task that is reported to the top management of the company.

Optimization of income and expenses - procedures that go hand in hand. Uncontrollable expenses will not bring profit to the company, and profit growth is directly related to cost control.

Confusion of concepts

Finance's cost optimization program often contains non-cost items.

To create the most effective program, the management team must understand the difference between the types of costs.

For example, cost control based on P&L would not be considered cost control.