We are living in an unprecedented time and facing once in a century event. In these times, it is necessary that leaders define strategic measures with respect to cost management to survive and thrive through such uncertain events.
The Pandemic has changed the business dynamics altogether. Earlier to the pandemic the entrepreneurs were able to predict or budget for expenses because of their recurring nature. This assumption is being seriously challenged during these times because of the uncertainties involved. The volatility of demand, the supply chain disruptions and uncertainty of timely availability of capital and labor made it extremely difficult for firms to plan for the future. Real time response to rapidly changing environment is the need of the hour. The many unknown factors surrounding the pandemic will throw different and difficult situations, the entrepreneur should constantly evaluate their cost,revenue and business models to adjust to these situations. Rapid Response to a new condition with a focus on company’s goal will help entrepreneurs to sail through these situation
Today we will be discussing cost control and cost management i.e. Strategically and Structurally managing the cost. These measures go beyond the traditional cost cutting measures adopted by entrepreneurs during tough times.Entrepreneurs need to manage their cost by being mindful about protecting their competitive advantage, future growth potential,to navigate through these uncertain times and to build value for stakeholders for a long term.
Failing to plan is planning to fail
A question may arise in readers mind on how to plan in such uncertain times? The answer to the question is preparing a dynamic plan which should be flexible to new changes. The Goal of the enterprises can be set, planning help in achieving those goals. During crises if we are caught unprepared it may result in plummeting top line and declining bottom line. Organisations that prepare themselves are better equipped to perform during turbulent times. So, it’s important that we plan for plausible events that may occur in a given period of time and prepare alternate plan to tackle different outcomes.
The Pandemic give a chance to the entrepreneur to revisit each of their cost elements. Leaders should reallocated/redirect the flow of resources to area of strategic importance and corollary to this decreased amount of effort and costs dedicated to non-strategic activities. Analysis of Cost elements help to identify wasteful expenditure and eliminate them completely. While analysing it’s important that entrepreneur understand strategic costs that are necessary to achieve company’s goal and strike only those cost which are not aligned with the overall objective of the company. It is important to manage cost associate to different stakeholders (like Employees, Lender, Lessor, Creditors, Shareholders etc) without severely impacting the operations.
Zero based budgeting (ZBB) can be used by companies, this will help companies justify each cost elements for every new period. ZBB is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analysed for its needs and costs. Budgets made with ZBB techniques are made for the upcoming period keeping in mind the need of the upcoming year regardless of whether the budget is higher or lower than the previous one.
Action Points (We will look how an entrepreneur can manage some of the cost items)
Employee Cost: Salaries and manpower is one of the biggest costs. More than the cost there is humane angle to employee cost. If a company is finding it difficult to pay salaries then instead of a salary cut it can introduce salary deferment plan. Alternatively, ESOP (Employee Stock options) can be issued so that employees can participate in the growth story of the company.
Rent Cost: Negotiating a fixed cum variable pay with the lessor will help manage rent cost better. Demand volatility of product and services will result is uneven revenue stream. To maintain a constant positive gap between revenue and cost line innovative methods like converting fixed expense into variable or semi variable can be used.
Interest Cost: Retiring high cost debts or linking your interest rate to RBI’s Repo rate. This will help reduce the interest cost as soon the RBI announces any rate cuts. Frequently communicating with banks to keep the interest rate in sync with the repo rates. Improving the company’s credit rating by monitoring it on continuous basis – this will help in reduction of spread charged by the bank over repo rate
In Conclusionentrepreneur should plan their cost model for upcoming period and monitor their cost elements on regular basis to avoid leakages and improve efficiency in the system. It is also important to not disturb the strategic cost which disturb current operations.
Next week we shall continue the discussions. Till then please apply and let me know your feedback at firstname.lastname@example.org .
I wish to personally thank CA Abhay Nair for his valuable contributions & Inputs by taking part in all the discussions pertaining to contents of this article.
(Dr. Anil R. Menon is a business coach and a Prof at S. P. Jain school of Global Management. He has own youtube channel MenonMantras where many videos are uploaded for the benefit of business community owners and entrepreneurs)