5 Ways a Business Owner Can Reduce Costs
In this economy, CEOs are looking to accomplish two things: increase revenue and reduce costs. Successfully managing these two areas, revenue and costs, produces increased profits. Managing only one and ignoring the other often means headaches and stress, and in some cases closing the doors. It’s easy for CEOs and business owners to focus on increasing revenue. Increasing revenue means working on the tasks that are mission-critical, or in other words, working on the tasks that “are the business”: i.e. building the better widget, selling the big accounts, and finding or increasing that competitive edge.
For many, controlling and reducing costs is an afterthought; sometimes a distraction. Cost directly associated with revenue are typically monitored very closely. These include the cost of materials, sales, and labor. However, some costs that are associated with “running the business” such as accounting functions (e.g. payroll, A/P, A/R), human resource management, and records management can be easily ignored. Not controlling or monitoring these indirect costs typically lead to a snowball of problems, such as increasing waste, risk of fraud, inflated labor costs, and higher opportunity costs. Here are five ways a CEO or business owner can better manage and reduce their indirect costs.
#1 Apply a “Method” to the Madness
One of the first things to do to gain control of an activity you or your business is performing is to apply a methodology or system to that activity. For example, instead of just shuffling through a random, unorganized stack of papers each time you are looking for something specific, you might sort the papers alphabetically by topic. Doing this allows you to more quickly locate what you are looking for each and every time you access that stack of papers. Applying a system of alphabetizing the papers means you can find things in a matter of seconds rather than minutes. Multiply that savings over each time you look for something and then calculate the cost of your time, and you begin to see that something as simple as alphabetizing papers can save you money.
Alphabetizing papers is just an example that everyone can relate to that illustrates the inefficiencies of attacking a job without a process in place that helps facilitate the job function.
Applying a standard method to a business activity is called “business process management” or BPM. Using the above example, papers don’t magically alphabetize themselves, so a process needs to be put in place to make sure that the papers are stored in their alphabetized state.
Automating a process can be one of the quickest ways to reducing costs. That’s right, costs. If done properly, automation can reduce more than just labor cost. Automation can also reduce defect remediation costs by removing human error (and other variables) out of a process. Automation will also help expose waste and more efficiently utilize resources. To clarify the point about reducing labor costs – automation doesn’t necessarily mean that you will be able to engage in a large scale reduction in force. It means that your employees will be able to focus their efforts more precisely and get more work done in less time.
Automation doesn’t mean implementing robots or spending massive amounts of capital on large complex computer systems. Implementing an automated process can be as simple as building a macro in an Excel spreadsheet, or it can be as complex as implementing an entirely new document imaging platform. In either case, similar to applying a “method to the madness”, you should be able to identify where time and/or materials are being saved and translate that into dollars.
Technology is the means to automation, but should not be confused with automation. As stated above, automation might be as simple as using Excel to calculate materials usage or an Access database to implement a simple workflow tracking system. Technology allows you to capture information at a scale that is unachievable in a manual process. Using the right technology for the right job should improve quality, increase speed and reduce waste. Technology should not be limited as just the engine that drives work through the process improvement steps, it can also be used to introduce work into the system (e.g. scanning a paper document or receiving an email) and exit the work from the system (e.g. print fulfillment or output data interfacing).
The right technology should make life easier for your employees and begin to compile valuable information on how well your company is performing both its core and administrative processes.
Information is key to process improvement. It doesn’t matter if that information is gathered through an automated process or if that information is compiled using technology. What is important is that you have information at your fingertips, so that you can identify key patterns and trends to determine the cost trajectory for your processes. As a CEO you are already familiar with doing this type of monitoring with financial data, market data, and when reading key performance indicators of your core business.
Information about all the processes in your business should be available to all the stakeholders in your organization. This allows those stakeholders (i.e. office managers, purchasing managers, warehouse managers, etc.) to perform the same analysis you would do for your business as a whole, but at a level that matches their area of responsibility. Now your stakeholders are empowered to make informed decisions on meaningful process change. They can see the benefits (or lack thereof) of those changes, beginning the process of driving out process defects and cost.
Now that your stakeholders have the information to monitor their processes, they will begin to feel more responsibility and ownership, rather than just managing the status quo. Process stakeholders that feel like they are contributing to the well-being of the company spend more time strategically thinking about how they can save the organization time, money and other resources; rather than reactively managing crises and cost overruns.
Sometimes it can be difficult for a CEO to relinquish some control over certain processes. How many times have you said, “All expenditures exceeding $1000 must have my approval.”, or “I must approve all new hire requisitions”? Doing this slows down the agility of your company; letting your managers do their jobs, lets you do yours. Relinquishing ownership to your managers is much easier to do when method, technology, and monitoring are in place.
There is always a cost to changing how your business runs (i.e. implementing a process change). Any change in process should at least merit a quick cost/benefit analysis. The bigger the change, the deeper the analysis. Analyzing process change can be a complicated endeavor. Quantifying cost savings in areas like waste and quality can be more difficult than those found in time and resources.
Implementing method, automation, technology, monitoring, and ownership brings you closer to being able to identify the true cost of improvement by providing you with the information necessary to make those decisions. Process improvement typically takes time, and in some cases, the cost of process improvement is front-loaded in the project. Don’t lose sight of the long-term goals and abandon a process improvement project too soon.
These ways of managing costs are time-tested. There are many methodologies on the market you can implement as well as software/hardware solutions that will provide you with the information necessary to more effectively run your business. As the CEO, it is up to you to initiate the process of change.