How To Reduce Costs In Your Company

Companies sometimes face tough times and have to take action to save themselves from nosediving into losses or worse, bankruptcy. History has shown cases of firms enduring difficult economic conditions. They only make it through however by cutting costs and optimizing processes.

There are many ways to cut costs, at different levels and for different kinds of businesses. Here are examples of methods with their advantages and caveats.

Laying Off Redundant Employees

The first solution that comes to mind is simple and effective but at the same time potentially problematic. Layoffs help drive costs down quickly since salaries are often big budget elements. The downside is potentially disgruntled employees who will be more alert to the next round of job cuts than to their daily tasks.

Layoffs can be difficult to implement for firms with a large headcount or with government controlled shares. In the first case employees might organise in unions and eventually bring production to a halt. In the second case the government might oppose such endeavours to save jobs for economic and political gain.

Suggesting Early Retirement

Through this method companies can offer its most senior and costliest staff an incentive to leave the company on good terms and at a lower cost than plain layoffs. If your objective is to reduce your costs as well as to reduce your head count this might be the ideal solution.

Incentives can include retirement bonuses or entrepreneurship training for those willing to try their hand at a business venture of their own.

Reducing Financial Costs

Banks are primary partners for companies in every industry since they extend loans and credit lines. Firms usually pump this cash readily without thinking about its cost. Interest rates are often dictated by the bank but there is always room for negotiations particularly if the company is financially healthy and big enough to draw important cash flows through the bank.

It is possible to negotiate an agreement with a new bank and try to obtain better conditions than at your current one. It is advisable to work with a few banks simultaneously and play the competition in your favor. And usually the smaller the bank the higher are your chances of tilting the balance in your favour.

Analysing Freight and Warehousing Costs

Warehousing and freight can constitute important cost centers for companies that ship their products and raw materials around a lot. In this case it might make sense either to outsource or to handle all freight in-house and invest in the appropriate vehicles depending on the activity of the firm.

Specialized firms can offer very competitive fees and reduce the complexity in managing the company's operations thanks to their expertise and economies of scale. It is often interesting for companies to outsource non-core activities. Only the biggest of firms are better off handling their operations on their own.

Reducing Inventory Levels

Excessive inventory eats up cash. By freeing up inventory you are effectively adding breathing room in the company's bank account. However taunting, reducing inventory levels is a difficult operation which involves the help of the sales department. Talking with and pressuring the management and the sales department to organise sales for inactive inventory can yield good results. This might or might not be possible depending on your market and products.

Excessive inventory can be an indicator of poor sales or production management which is worth looking into to alleviate this kind of problems in the future. While some industries need to have higher levels of inventory to operate or to insure its operating safety others can safely reduce these levels without impacting heir operations.

Hedging Foreign Exchange Risk

Companies involved in international trade are often subject to the fluctuation of foreign currencies. Whether you are importing a large share of your raw materials or you rely on exports for your revenues it is important to put in place a way hedge those risks.

There is a variety of instruments available to reduce a firm's exposure to currency risk such as futures, options or forwards. Hedging will protect your margins and even help lock your selling prices in advance simplifying treasury management at the same time.

Reducing Paper Use

While it might not save much in expenses for a modern company that use software extensively it might be a good path to investigate for firms that still use a lot of paper in their day to day operations. Reducing paper use decreases your costs and enhances your ability to control and manage operations by moving to a software based solution. The same applies for other expendable products such as pens, ink, folders, etc.

Management can encourage the use of email and software among its employees to achieve this objective. Nowadays there is a software for everything, all you need to do is start looking for them. While there are highly advanced commercial solutions that might need a costly investment others are affordable and sometimes even free and open source.

Replacing Costly Software

Most companies employ vendor solutions when it comes to installing ERPs or other enterprise solutions. However you might not need the whole package and therefore negotiate a watered down version of the software for a lower fee. Moreover you can use open source software which is completely free and often provides as much functionality as a commercial solution. Another solution is to develop a solution that is specific to your needs in-house if you have the resources to do so.

Conclusion

As a whole managers should look for real cost drivers to benefit from cost cutting actions over the long term. While you can cut costs in many ways when you identify problematic cost centres and take action in their regard the company can enjoy durable reductions in costs.