How to cut costs
Monday, March 19, 2001
The current business downturn is being termed by economists variously as a "hard landing" or a "recession." What is sure is that, in the present return to the realities of paying bills and repairing balance sheets, public shareholders, private owners and even creditors are going to be watching carefully for ways that businesses can cut costs while not harming sales.
This is, it should be said, as much an art form as a management science. Too often in business downturns, firms cut advertising and marketing budgets, further reducing sales. This is a self-destructive cost-control method because it targets an important contributor to sales in order to cut expenses. It's far better to aim for costs that are unrelated to sales or that are effectively post-sale items on a firm's income statement.
According to Debby Stern, a partner in KPMG's owner-managed business unit in Toronto, a list of leading cost controls has to begin with inventory management.
"Firms have to sell damaged or obsolete inventory to realize cash. Excess inventory is a redundant asset and it has to go," she says.
"Then look at your list of assets to determine which ones are dead and which are productive. A firm can sell dead assets like unused real estate to realize cash for better use in the business."
Firms also should examine what makes scrap and how scrap production affects various product lines. Reduced scrap output should lead to more efficient production, she notes.
Next, firms should look at their suppliers to see if renegotiation or use of other suppliers may generate costs reductions on inputs. "If a company is dependent on one source of supply, it may be paying higher prices than necessary," Stern says. "Alternatively, if you have a preferred supplier, it may be possible to discuss price reductions so that you can retain competitive costs."
Savings are possible in the back office as well, Stern advises. "You want to make use of what are acceptable times to pay your own bills. If your industry standard is 30 to 45 days, then use it unless you can get good discounts for fast payment. Two per cent off for payment net within 10 days is common, she says.
"What management has to do is to compare the cost of money to the discount earned," Stern emphasizes. "The firm should pay down debt with the highest interest rates and make sure that if the business has excess cash, it gets an interest return."
Tax-instalment management also is an important area where money can be saved, Stern adds.
Firms have to make instalment payments based on the previous year's tax payable or on estimates of current-year tax liabilities, she notes. If a firm underpays on tax, it faces interest on the underpayment of 10 per cent, compounded daily. Worse, those payments are non-deductible.
"Rather than underpay and face these costs, a firm that needs cash should pay taxes due with a bank loan," she says. "Money paid to the lender for a business loan is tax deductible. So don't be in debt to the government and don't harm yourself with underpayments of taxes due."
Managing the wage bill is another often-fruitful area of cost savings, Ms. Stern says.
When you need employees, examine the cost of overtime versus the cost of hiring temporary personnel, especially from employment agencies. And consider using government programs that pay for or assist in hiring students.
Some balance-sheet assets may be unrelated to the company's business, Ms. Stern notes. Real-estate holdings that sit idle, for example, add nothing to productivity. Either get the real estate reappraised if tax bills on it are too high, or sell the real estate to get cash to put into the business, she advises.