Reducing Your Cost Base
Over the past 5 years the economic climate has been particularly tough for Irish businesses. Revenues have fallen, profits have dropped and in some cases businesses have failed outright. Our experience indicates that those who adapt and change quickly are best positioned to survive. Increasingly we see that successful businesses are the ones who
accurately define and manage their cost base. The following note is somewhat simplistic but gives an overview on 2 specific considerations when identifying and reducing the costs of a business.
1. Strategic Cost Rationalisation
Cost reduction projects require planning. Businesses need to analyse the trends of cost and consider the underlying relationship between expenditure and product /service delivery. To do this businesses need to highlight the drivers of costs and examine the associated value chain. Once the value of a cost has been established an appropriate cost target can be set.
It may be useful to consider using the following techniques to direct such a process:
- Adopt a relevant projection tools
- Outsourcing non critical functions
- Benchmark against market competitors
2. Business debts
Debt - servicing can drain profits/cash from a business. In some instances it may be worth reducing the business’s exposure to debt. The process of “de-gearing” and “de-leveraging” can benefit a trade by:
a) Reducing the uncertainty regarding fluctuating interest rates and;
b) Demonstrating the stability of the business to its stakeholders.
Some alternatives to debt might include:
- Injection of Equity
- Disposal of surplus assets
- Deferral of investment
- Reduction of dividends
- Renegotiation of repayment terms
Conclusion
To survive in today’s climate businesses need to determine an appropriate cost base and then set about planning how to achieve this level of expenditure. We believe any time spent by management in this regard should be viewed a valuable business investment.