Cost Saving Techniques for SME’s: (Part -1)

It’s not about how much money you make it’s how you save it. In these challenging times, each and every penny counts and we as Accounting and Finance professionals being the backbone of the Indian Economy need to reciprocate likewise how other professionals are serving to the best of the national interest and their profession. The world economy will go into recession this year with a predicted loss of trillions of dollars of global income due to the Coronavirus pandemic inviting serious consequences for developing countries, according to the latest UN trade report. With this, the role and responsibilities of Finance and Accounting professionals has grown manifolds. They need to gradually transform these challenges into opportunities and ensure that the organization starts sailing smoothly without any major turbulences. In these series, we are trying to enlist some illustrative scenarios with regards to cost-saving strategies that can be implemented to ensure a roadmap to the success of the organization.

Strategic Cost Management: Strategic cost management is the overall recognition of the cost relationships among the activities in the value chain, and the process of managing those cost relationships to a firm’s advantage. Costs directly linked to the product and quality defined competitive edge are strategic, rest costs are simply overheads. It is pivotal for the organization to identify and segregate these costs which are of utmost necessity and deal with them tactfully. 

Circumvent unwarranted expenses: At times entities are trapped in expenses that yield zero value to the business. Promoters should identify such expenses and ensure that they don’t turn up being a routine expense. Such expenses should be periodically reviewed. Careful demarcation of fixed and variable expenses is the key to cost control management. There is always a scope of elevating or compressing flexible costs as per the need of the business. The best example is leasing versus owning an asset or in case of fixed incentives to variable perks. Track your expenses for last month and tick mark those expenses which you have expended without enjoying it. If there is no business need to stop incurring such expenses. The key to vertical growth in the bottom-line lies in refraining from incurring sentimental, impulsive or emotional expenses.

Reduce Costs with Outsourcing or by Subcontracting: Being the promoter what matters is bloating bottom line. It would be prudent at times to focus on core competencies rather than entering unchartered territories and turning away business in the lure of making a profit. The best practice is to assign or subcontract the said job to a third party. The more the projects, the more will be the volume that will transpire on a positive note in your bottom line. With technological advancement, there are a lot of things being taken care of by experts and consultants via outsourcing. Initially hiring outside vendors may result in spending more money, but statistics reveal that they in the longer run, end up yielding better results as being handled by experts.

Lower financial expenditures: Avoid being trapped in easy finance. There are myriad options available in today’s world for availing finance which calls for an understanding of terms and conditions of the lending, thorough cost-benefit analysis, Understanding the concept of Opportunity Costing and insight of cash flow analysis. It calls for rational and proactive decisions as any excessive commitment may dampen your credit rating and credibility in the market.

Space Management: Some organizations prefer to hire commercial premises which eat away the major chunk of the profit. Make it an internal process to make optimum utilization of your physical space. Identify space wasters. Try to centralize different departments and functions wherever possible. 

Design Budget: Most of the small organizations give an iota of importance to Budgeting. They live on a perception of “May Come What, We will be prepared”. You can’t manage what you can’t measure. According to Bob Fifer, the author of the book Double Your Profits, if you want to save a lot of money in very little time, set a budget. It can save you a significant amount of money every month. On a monthly basis prepare deviation reports which will help the business to take corrective actions. The budget also lives a room to validate your financial standing amongst your peers or syncing the same with industrial standards. In today’s digital world financials of corporates are easily available – the same can be used as a tool to implement corrective actions.

Vendor Management: Consolidate your purchases and negotiate better pricing. Try to avoid multi-year contracting with any particular contract. Keep on renegotiating your contracts on a yearly basis. This will bring impart flexibility to new concepts with competitive pricing. Negotiate with the vendors to deliver at the time of sale. You end up paying rent for the space occupied by inventory as well as a commitment to the vendor. The best practice is to adopt a “Just in Time” approach. Start involving vendors in the cost control process. Once suppliers are aware you’re watching costs, they may start being all the more diligent, especially if they know the other purchasing options available to you. Make a provision of payments to vendors and try to settle them as early as possible as most of the vendors offer flattering discounts on prompt payments. Even a discount of 1 0r 2 % can significantly help in strengthening the bottom line.

Improvise Negotiation Skills of your staff: Negotiation is a skill that can do wonders for any organization. Invest in improvising the negotiation skills of your staff by either rewarding them or enrolling them in professional certification programs. Authorize your employees to identify inefficiencies and identify ways to save time and money and reward them evenly.

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About the Author: Falgun Shah

Falgun Shah is a Qualified CA, CFM, M.Com, Dip in Taxation and Insurance with over 2 decades of work experience in India and abroad in Finance, Accounting and Taxation arena.

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