Increasing sales is important to
any profit enhancement plan. But cost
cutting cannot be left out. If you are
operating on a 10 percent net profit margin, a $1 cost reduction is equal to a
$10 increase in sales.
In order to achieve lower costs,
you should perform a cost-cutting audit annually. First, identify your biggest costs and assign
them to cost centers. Then use those
centers to allocate the remaining costs.
Once you categorize your costs and understand their relationship to your
business, you can implement cost cutting.
All companies attempt to do cost cutting, but they often fail.
Successful cost cutting requires
you to follow three simple but painful rules:
- Make cost cutting a continuous activity. Most companies have cost-cutting drives
at intervals of several years, and generally only during business
downturns. In between, only a token
effort is made to run economically. You
can win big by having all of your managers work on cost cutting every day. Require a written report on their progress on
cost reduction every quarter. This not
only reduces problems in bad times, but can substantially increase your cash
flow during the boom times. This is a
much more efficient way to cut costs.
Crash programs tend to result in process hang-ups and quality problems
because the measures taken are not thought out and are implemented in a
hurry. Continuous cost cutting gives you
the opportunity to carefully test results and avoid false economies.
- Cut the major costs first. It seems obvious to start where the money
is. Unfortunately, I have sat through
countless meetings where the cost cutting applied to as little as one percent
of the total costs. Be creative! Look for ways to cut costs that don’t affect
efficiency or reduce your product’s quality.
- Cut costs by eliminating, not reducing,
activities wherever you can.
As you examine each cost and cost
center, the first question you should ask is, “Can we get rid of this
entirely?” The answer of course will
probably be “No!” You can jar your
people out of that rut by rephrasing your question like this: “Okay, suppose we were forced to stop
doing it. What would we do instead? Would it be cheaper?” Don't even consider your options for reducing
the cost of an activity until you have convincing evidence that it is
impossible to eliminate it altogether.