Businesses need to think about cost models to thrive

There is no doubt that Covid-19 has led or will lead to a cost optimization exercise for many businesses.

Temporary freezes of new hires, renegotiation of key contracts, revision or postponement of CAPEX investments, optimization of inventory levels or reduction of performance bonuses: here is a rundown of some measures that organizations have already taken to respond to the situation.

These are examples of typical tactical actions focused on short-term cost savings. Still, there is more to the cost story: while short-term initiatives are needed to deal with the current situation, more structured and strategic thinking on cost models is needed to drive the recovery and prepare. businesses thrive in these uncertain times.

Therefore, business leaders have strived to reduce costs and risks not only to maintain profitability, but for their very existence in most cases. Every business entity must have a plan to reduce costs in such an inflationary operating environment.

Hourly

In general, when is a good time to start optimizing costs? Is it okay to ignore costs when your business is soaring? Or should you wait until the signals are clear that demand has gone down and costs have gone up before starting cost optimization initiatives to maintain performance?

While cost optimization should be a priority for all businesses regardless of the business cycle and should be a daily activity, the reality is that when times are good it is on the back burner, and in times of downturn it is. becomes critical.

The other side of the story is that the same companies that had cut costs before for a variety of reasons allow fat to accumulate as volume and profits increase.

Basically, cost cutting in Sri Lankan businesses has been cyclical. This is a major weakness of Sri Lankan businesses. Should you wait for the ship to sink before plugging your profit leaks?

Mentality

One of the first things managers need to change when approaching cost optimization is their mindset. It helps to think about cost reduction in terms of weight loss program.

You can lose weight temporarily with heavy dieting and an aggressive training program, but to maintain the right BMI over time you need to adopt a healthy lifestyle and diet for the long term – that should be a commitment. day-to-day.

Likewise, only managers who take the time to examine the cost structure across their organization and embed cost discipline into the culture of their organization will see lasting gains over the long term.

It is not easy to compete in the market today. Sometimes it seems like a business is on top of a set of expenses and in the meantime another part of the business starts to experience cost overruns.

It is an endless battle to keep the business profitable. Businesses need to better understand what drives costs in their business to ensure that cost reduction is targeted in the right places and that the success of cost management initiatives is properly measured.

Easy options

Companies often choose the easy options for cost initiatives, rather than the ones that will deliver the most savings. While budget and staff reductions lead to short-term cost savings, reducing the complexity and improving the efficiency of processes can generate significant and lasting benefits, but only if carried out in a meaningful way. rigorous and continuous.

Companies must also be ready to adopt major changes in their business model in order to remain competitive.

Everyone in a business has a role in managing costs, regardless of job level, but these responsibilities are usually not clear in many organizations.

A clear strategy and open communication are vital for the success of any business venture, but even more so around cost reduction initiatives, where employees can naturally feel threatened by change.

As part of this holistic view of costs, managers must take responsibility for change beyond their own department, and employee rewards around financial incentives must align with business strategy.

The coronavirus pandemic has caused numerous disruptions in the supply chain. The costs have risen beyond the understanding that business leaders must respond to on a concrete plan that brings every employee together.

In conclusion, at the end of the day, it is very important to understand the relationship between cost and value, whether it is a pandemic environment or otherwise.

The decisions you make should consider cost and value. If the value created by engaging in a specific activity is greater than the costs generated by that activity, it is advisable to engage in that activity.

However, it is never recommended to engage in an activity whose costs are greater than the value that will be created by that activity. This is a principle that should always be taken into account in all cost management decisions.


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