Increasing profits is a fundamental goal for companies. In difficult economic situations, however, attempts to increase profits by raising sales or increasing margins by acting on the price side of products sold can be particularly challenging. Above all, but not exclusively, in these situations, an important contribution to profit growth can come from acting on the side of business costs. A reduction in business costs, especially overheads that do not affect the value of the product sold, has an equivalent impact on company profits. An organic intervention on the cost side can be developed along the following four dimensions.
Introducing a Cost Management Strategy in the company is a fundamental step to start managing costs strategically. A good Cost Management Strategy recognizes the strategic nature of costs; costs are no longer just a budget item to be reduced in the short term, but one of the fundamental levers available to management to implement a successful long-term strategy. Costs are no longer evaluated only for their current amount, but for their consistency with the company's strategy, their dynamics over time, contractual aspects, and relationships with suppliers.
- Eliminate unnecessary processes and activities
In every company, over time, unnecessary processes and activities accumulate, that is, processes and activities that add no value but continue to generate costs. From a cost reduction perspective, these are the first to be addressed. Eliminating these processes and activities allows costs to be reduced without decreasing the value of products and enables significant savings, as all costs of the eliminated processes are cut and not just a portion (net, in the short term, of a share of indirect costs that cannot be immediately compressed).
- Reduce the costs of resources used
Even in value-creating activities, costs often exceed the optimal level. The reasons are usually due to the inability of many companies to dedicate resources to reconsider decisions made in the past regarding suppliers, supply methods, supplier control, process methods, and contractual conditions. Over time, solutions adopted in the past may no longer be the best alternatives available on the market or may no longer align with current processes.
The intervention of an external specialist in cost reduction can allow the company to identify non-optimal situations and possible alternatives available on the market more quickly and effectively, leveraging their best practice experience, while company management continues to focus on the current and strategic management of the company.
- Monitor Cost Performance
No cost reduction activity can be considered complete without tools to monitor cost trends over time and the full cost of individual processes, activities, and products.
Cost allocation, budgeting, and variance analysis tools with an Activity Based Costing approach allow the analysis of company cost dynamics over time and in relation to other company dimensions, such as volumes, product portfolio mix, organizational structure, and business processes. Accurate measurement of cost dynamics allows verification of the effectiveness of the Cost Management Strategy and provides useful indications on how to improve it.
Optimizing the level and structure of company costs is possible through professionally and methodologically correct interventions. Optimizing costs allows for improved company profitability and increases the financial resources available for investments, dividend policy, and optimization of the company's financial structure.
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