Cost optimization: plan, activities

Cost optimization at the enterprise is a necessary and important stage in an economically unstable situation. Let's consider it in detail.

Main questions

To do everything right and not to become a “tyrant and satrap” in the eyes of staff, you need to understand:

• existing types and options for reducing costs;
• principles and planning methods accompanying cost optimization activities;
• the most effective ways to reduce costs from a practical point of view;
• ways to reduce material costs;
• the essence of the benefits of reducing transportation costs;
• ways to choose a strategy to reduce costs;
• basic principles of optimization.

Budget

Often they try to shift budgeting to a department whose employees believe that they are not fully competent in this matter. However, budgeting is an important step. Participation in it allows you to get a large amount of information that is important for all departments.

The budget is formed in several stages:

• the formation of a project plan for the future budget;
• consideration of the draft budget;
• budget approval;
• budget execution;
• performance analysis.

Optimizing budget expenditures is the next step after budgeting.

Expenses

Cost optimization is not possible without understanding the content of the term "expenses".

They are those funds that are involved in the formation of profit for a certain period. Part of the costs accrues in the form of finished products, semi-finished products, intangible assets or construction in progress in the assets of the company. The diagram shows a simplified structure that complies with IFRS.

Simply put, expenses are an increase in liabilities or a decrease in assets, which leads to a decrease in capital.

Optimization

It is believed that cost optimization begins with cutting costs at the moment. However, this is not quite true.

Optimization of budget expenditures at the enterprise does not begin at the moment when they begin to tightly control the spending of money that is already on the account. Unfortunately, at this moment the question of where the money comes from in the account is not controlled at all. Attracting active lending, as well as managing expenses only, entails a chronic shortage of funds at the enterprise, and then possible bankruptcy.

The effectiveness of this procedure depends on the accounting of income and expenses. These articles need to be planned, and management should constantly monitor the numbers by year, quarter, month, or other financial period. There is always the possibility that currently costly projects will be very profitable in the long run.

Areas of work

Cost optimization does not mean taking actions to the detriment of business interests. The task of reducing costs should be solved in an optimal way, when comparing costs and revenues with each other.

The issue can be solved in several directions:

1. Cost reduction due to internal resources (direct reduction). Such actions include increasing productivity, reducing material costs, reducing management costs, as well as reducing the staff of the enterprise.
2. Reduction of production costs (relative decrease). This can be achieved by increasing production. In this case, much less money will be spent on one part.
3. Proposal formation due to marketing research. In this case, the growth in customer purchases is stimulated and an influx of new customers is formed.
4. Formation of strict financial discipline. In this option, a "go-ahead" for expenses can be given by a limited circle of people.

A budget spending optimization program should cover the narrowest areas. Then it will be as effective as possible.

Optimization ways

A cost optimization plan can include three areas that an enterprise can take.

Highlights express reduction, the reduction of enterprise costs at a rapid pace, systematic reductions.

Each of the methods is applied in a specific situation. The measures taken in this case should be consistent with the current state of affairs and should also be based on long-term planning.

Express reduction

Having chosen this method to reduce costs, it is urgent to stop paying expenses for certain items. To determine the result, you need to find out the likely consequences of each optimization method.

All costs are divided into:

• High Priority. Such costs are necessary for the enterprise to continue its activities. These include the payment of wages to employees, the purchase of raw materials for production.
• Priority This is the cost of paying for mobile communications, advertising. If you stop payments under this article, then the company's work will fail.
• Valid. These include benefits for employees, payment of sanatorium treatment to staff. If the company does not have available funds, then these payments can be suspended, but it is preferable to keep them.
• Unnecessary. An example of such costs is the payment of a private flight for the head of the company. Cancellation of such expenses will not adversely affect the company's activities.

When choosing express cost reduction, first of all they stop paying under the “unnecessary” item and sharply limit the allowable. The first two categories are not desirable to reduce.

Fast cost reduction

Cost optimization at the enterprise at a fast pace is possible as a result of a number of measures. To reduce costs as efficiently as possible, management must determine what they save on first.

1. Save on materials for production and raw materials. Ways to optimize costs can be different. Revision of contracts with suppliers in order to obtain goods at a bargain price is the most effective way to reduce costs. Suppliers can also offer deferred payments, which will give the company the opportunity to collect the necessary amount without obtaining additional loans.
2. Analysis of transport costs and optimization of this item of expenses. In addition, you can reduce the cost of electricity, telecommunications. The transport department can be outsourced, and then contact the logistics center, which will draw up a program to reduce transport costs. To reduce the cost of electricity, control its consumption, monitor the level of illumination in the dark, and install energy-saving equipment. Reducing the list of employees who are assigned corporate mobile communications will significantly reduce costs. You can negotiate with a mobile operator or a telecommunications service provider about concluding a corporate contract with favorable terms.
3. Staff cuts and payroll reduction. Outsourcing and freelance effectively reduce the cost of paying salaries to staff, and recruiting companies or the internal recruiting department will help replace inefficient employees. For example, it is not necessary to have a cleaning lady on staff. Outsourcing staff will save up to 20% of payments per employee.

Another option is cost optimization by reducing wages, but providing social benefits: expanding the list of medical insurance conditions, providing employees with meals at the expense of the company or free coffee in the machine. Studies show that investing in this case will be profitable in the long run, as it will increase staff loyalty.

Systematic abbreviations

As the name of this optimization method implies, its essence is to carry out periodic activities aimed at reducing costs.

1. Investment management. Long-term investments should always be carefully justified. In order for a company to acquire new, more efficient equipment, the interested department must argue what the company will benefit when this project pays off, when it starts to bring profit. The introduction of new competitive technologies helps business development. However, in deciding to purchase something, management should be mindful of the main goal - reducing costs.
2. Procurement management. It consists in the periodic search for new suppliers that provide quality products at more favorable prices.
3. Business process management. "Sudden management", so inherent in our country, greatly affects the principles of doing business. From the point of view of new techniques, when organizing business processes, it is proposed to look at production from the side of the buyer. Conduct a process analysis. The company manager needs to ask himself, will the buyer pay for this? The client does not want to pay for the movement of goods, downtime, re-equipment of production without changes that improve the goods. Therefore, such costs need to be either reduced as much as possible or completely get rid of them.

Optimization Rules

When preparing an action plan for optimizing expenses, you need to remember that a situational solution to the problem is not always the best choice. Cost reduction is a routine work, the daily implementation of which should become a good habit.

By observing the optimization rules, you can achieve the maximum effect with the least loss.

1. Costs do not always need to be reduced; more often than not, they must be effectively managed. Sometimes, in order to reduce general expenses, it is necessary to increase the size of expenses in a particular direction.
2. Costs are minimized to achieve the best results. The efficiency rule says that one unit of costs must ensure the maximum result.
3. There is always cost - whether it is action or inaction.
4. There are no trifles in matters of expenses. Let the company employees get angry about the report on the use of the third dozen pens in a month. But getting used to the respect for the little things, as a result, they will be able to see an increase in salary or an improvement in working conditions.
5. The desire to minimize costs is not always useful. Optimal may be a slight reduction in costs and maintaining them at the required level.
6. Optimization of budget expenditures is impossible without financial investments.
7. There is a type of expense that avoids even greater losses. These include insurance, security hiring, installation of an alarm system, and product quality improvement.
8. All employees of the company should be included in the process, but each should have its own, important task for him.
9. Caution is not unnecessary. The thought that slipped in your head or the suspicion that appeared as a result of reading the report makes you deeper analyze the indicators and almost always lead to lower costs.
10. Cost optimization should be ongoing. New expense items affect company profits. Appearing suddenly and suddenly disappearing unnoticed, they can cause significant damage to the enterprise budget. Tracking expenses should be a mandatory task, reporting on the implementation of which is submitted to the general management of the company.

Optimization of income and expenses - procedures that go hand in hand. Uncontrolled expenses will not bring the company profit, and profit growth is directly related to cost control.

Confusion in terms

The cost optimization program drawn up by the finance department often contains items that are not cost related.

To make the most effective program, the management team must understand the difference between the types of costs.

For example, cost control based on P&L (Profit and Loss Statement) will not be considered cost management.