Most organisations are able to reduce costs with the help of an integral department to this exercise - the finance team. But it takes strategy, critical thinking, and a combined effort from the business owner and finance staff.
According to a 2021 CFO survey, 90 per cent of Chief Financial Officers (CFOs) have recorded an increase in their company costs. Unfortunately, most CFOs expect it to last well into 2023.
Most businesses have chosen to transfer these costs into consumer prices, or absorb them through developing cost-cutting measures. But it doesn’t stop there, as COVID-19 has further escalated cost-cutting efforts. A study from Delloite shows that 70 per cent of CFOs have implemented cost-reduction strategies for their company.
Optimising costs is an essential part of the finance function. But most CEOs mistakenly assume that it should only be the responsibility of finance teams. Instead, business owners should be involved in this process with the finance team because effective cost-cutting requires relooking at business processes and efficiencies - but more on this point later.
So what can business owners and their finance teams do to cut costs? We've identified four fundamental approaches.
Be clear on what goes in and out
A properly functioning finance team should be clear on the expenses that go in and out of the company. By knowing where and how the money is spent, businesses can plan and allocate budgets efficiently and prevent fraud from happening.
Unfortunately, most payments are made in a monthly cycle, which means that there's less visibility for finance teams. For example, in our recent case study, a childcare operator lost much of their company funds because staff would use a corporate credit card and not send in the receipts afterwards, resulting in inefficiencies when processing claims.
Cut miscellaneous cost
Miscellaneous costs can come in many forms, such as an unused space in a warehouse, underutilisation of company equipment, or overspending on mismanaged company supplies such as paper.
Paper is a source of waste that’s often overlooked. According to research, up to 3 per cent of a company's revenue is spent on paper management activities such as printing, filing, and storing. Besides that, 50 per cent of a company's waste consists of paper, which can be reduced by using electronic documents and cloud storage.
Finance teams can identify any cost leakages and underutilised assets that need improvement and begin to make the necessary changes to reduce costs.
Cut cost incrementally
McKinsey states that a proper cost-cutting strategy requires at least two or three years to 'make it stick.' Unfortunately, most finance teams are pressured to make quick, short-term cost reductions which are often not sustainable in the long run.
To effectively reduce costs, business owners and finance teams should focus more on cost management than cost reduction. For example, a finance team in a childcare organisation could try to reduce costs by employing fewer assistant teachers in their classrooms, but how would that affect the quality of their service? And is it viable in the long run?
Most short-term cuts don't respond well to a changing business environment. This is why effective cost cuts require relooking at processes and organisational structure - and this cannot be done by the finance team alone.
Rethink department structure and processes
A lean, no-frills process will not only help finance teams and companies reduce costs, they also enable them to become more efficient.
For example, a Harvard Business Review study found that banks who cut down the over supervision of their tellers managed to reduce costs by two times the amount. It also found that companies who strategically allocated their 'supervisor to staff' ratio could save up to 20 per cent of costs.
Small finance teams probably won’t benefit from lean restructuring, but they can turn to automation to reduce outsourcing without overworking themselves.
So relook at some of the current processes and make sustainable cost-cutting changes from there. For example, most businesses are surprised at how much their reimbursements and corporate credit card process actually costs their company.
When spending is okay
Companies should redesign work structures to get serious about cutting costs (i.e., how can I still generate the same output while creating a sustainable cost reduction strategy?). Doing this requires creativity and knowledge of the latest trends in the industry. For example, companies who use pre-loaded cards as a substitute for traditional expense management methods can cut labour costs and reduce indirect costs from manual errors.
Budgetly’s preloaded card and expense management software help Aussie companies be more efficient in the expense process and save up to 30 hours a week of manual time through automation. To learn more about us, download our eBook, Managing Expenses with Budgetly. Alternatively, schedule a demo today for a personalised chat with our team.
