Increasing sales is important to any profit enhancement plan. But cost reduction 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.
To achieve lower costs you should perform a cost reduction audit annually.
First, identify your biggest costs and assign them to cost centers. Then use those centers to categorize the rest of the costs. Once you identify your costs and understand their relationship to your business, you can begin trimming your costs. All companies attempt to do cost cutting at some point, 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 zealous attempts every few years, but generally only during business downturns. In between, only a token effort at most is made to operate more economically.
You can win big by having all of your managers work on cost cutting every day. Require a written progress report on cost reduction every quarter. This reduces your problems during bad times but it will also increase your cash flow during the boom times.
What’s more, 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 very well thought out and are generally implemented in a hurry. Continuous cost cutting gives you the opportunity to carefully test results and avoid false economies.
2. Cut the major costs first. It seems obvious to start where the money is, doesn’t it? Yet I have had to sit 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 won’t affect efficiency or reduce your product’s quality.
3. 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 be no, but you can jar your people out of the rut by rephrasing it. “Okay, suppose we were somehow forced to stop doing this. What would we do instead? Would it be cheaper?” Don't even consider your options for reducing an activity’s cost until you have convincing evidence that it is impossible to eliminate it.