When Chief Financial Officers (CFOs) are tasked with leading business cost-cutting initiatives, by necessity they find themselves navigating between the certainty of change and the tendency to defer short-term operational pain at the risk of much more drastic and far-reaching consequences in the future.
While there is nothing that can be done to completely avoid that fate, one way to minimize internal resistance associated with a cost-reduction effort is to explicitly target non-staff related costs first.
It is absolutely essential that middle management and staff understand that the goal of most cost-cutting initiatives is to eliminate unnecessary and out of control expenditures versus cutting jobs specifically. The greater the success at the former, the greater the probability that job cuts or staff reductions will be minimized or avoided entirely.
Possessing a clear and accurate understanding of a company’s financial and operational standing not to mention strategy for the future is a complex endeavor. That’s what having a skilled CFO is for. But when it comes to cutting costs without eliminating jobs that company growth may require, failure to adhere to some straightforward principles is what causes many companies to get off track.
A solid plan for a cost-cutting initiative should include the following elements:
Goals: The change agent must have answers for key questions, such as is the cost-cutting push an internal decision, or is management’s hand being forced by lenders or shareholders? Is the mandate a specific dollar amount or a percentage of revenue? Are certain functional areas deemed of greater or lesser strategic significance? Are the targeted savings to be net of one-time expenses? What is the timing of the cuts? What will be the impact on either Gross Margin or Operating Margin? What about the short-term and long-term cash flow impact?
Structure: Minutely understanding the company’s cost structure is necessary for driving lasting change. In this realm, the more granular the detail, the better.
Perspective: Expenses that seem like waste to one person can seem essential to another. Knowing not only what is spent and where, but why, is essential.
Alignment: Successful CFOs know that a laser focus on numbers while disregarding relationships inside and outside the company is a route to failure. Run a transparent process. Discuss preliminary findings with fellow management team members, share your thoughts and impressions, invite suggestions, and welcome debate. Successful alignment features broad consensus on the areas that should be most and least impacted, and why.
Implementation: Perhaps the simplest yet most overlooked principle is that a good plan must be actionable. Not only must cost-saving opportunities be identified, but a sound and realistic plan for taking the steps necessary to achieve the savings must be developed.
While every company is unique and all cost-structure elements deserve scrutiny, a number of prominent areas of financial inefficiency are common across all industries. These are areas such as rent for office space and equipment, vendor pricing, travel and entertainment and IT-related spending.
Companies often lease excess office space in anticipation of future growth. Should that anticipated growth fail to appear, a company can easily find itself with considerably more space than necessary. This can be especially egregious in companies with multiple locations.
Just as companies often wind up with excess space, they can also find themselves with excess equipment. Whether as seemingly innocuous as a high ratio of telephones to office staff or as egregious as more leased trucks than staff at a satellite office, this is an area that’s always worthy of careful investigation.
Too often, cost-saving initiatives take Gross Margin as a given, and the mistake is made of addressing only operating expenses. A careful review of spend by each vendor can identify opportunities to negotiate volume-based discounts that yield substantial long-term savings.
Poorly designed and implemented expense-reimbursement policies can result in exploding travel and entertainment (T&E) spending. Clear policies that are standardized and accurately enforced, can generate noteworthy savings.
A regular audit of IT spend tends to identify areas of inefficiency. These items can be as simple as having too many landlines, or as bothersome as determining the correct number of licenses for a reporting tool.
It’s often possible to achieve substantial savings without reducing headcount. Change is difficult but necessary to accomplish company goals and strategic targets. If you are a business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company manage costs, improve cash flow, accounting and billing process management, as well as profit margins, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.
CFO Growth Advisors (CGA) specializes in unique and highly effective growth strategies that are tailored to help companies grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.