Managing costs

Decreasing costs in the first phase of an economic slump is easy because people tend to lose focus on doing so when business is booming. As a result, finding ways to contain costs when the economy contracts is not that difficult.

In contrast, generating profit improvement during a mild recovery can be extremely challenging because management teams have already addressed the most obvious inefficiencies in their businesses, says Mark G. Metzler, CPA, director at Kreischer Miller.

“A company’s financial viability depends not only upon its revenue but also on effective management of costs and expenses,” Metzler says. “During these challenging times, managing costs has become a top priority for business owners.”

Smart Business spoke with Metzler about how to approach sustainable cost management in a challenging economy.

What makes managing costs in this economy more challenging?

Too often, companies focus on increasing revenue without fully understanding what is happening to the cost side of the business equation. Many organizations lose sight of the true cost when they are expanding their product lines or service offerings to meet customer requests. Companies need to analyze their cost structure to identify all of the costs associated with providing each product or service. Once the true costs are identified, it is often easier for the business owner or manager to effectively allocate resources to the work that is most profitable and eliminate those that are determined to be too costly.

While it may seem counterintuitive in a stagnant sales-growth environment, sometimes enhancing profits means cutting sales efforts. The Pareto Principle tells us that 80 percent of profits are generated by 20 percent of your customers. But do you know which customers are in your top 20 percent?

By performing a critical analysis of customers or products, management might find that cutting sales efforts in less profitable areas of the business and shifting resources to the most profitable areas can increase overall profitability levels.

Top-line growth without bottom-line improvement can be disastrous. The goal should be to work smarter, not necessarily harder.

What can business owners do to get a better handle on their costs?

What you can measure, you can manage. Organizations that actively monitor operations are in a better position to uncover costly problems before they impact the bottom line. Successful companies recognize that it’s not about accumulating volumes of financial data but rather using ‘information dashboards’ that compile key performance indicators for any business function that managers want to track. Dashboard information is provided in real time, enabling the CEO or owner to take the pulse of the entire business at any time.