We are living in an unprecedented time and facing a once in a century event. In these times, leaders must define strategic measures concerning cost management to survive and thrive through such uncertain events.
The pandemic has changed the business dynamics altogether. Earlier in 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. The volatility of demand, supply chain disruptions, and uncertainty of timely availability of capital and labour made it extremely difficult for firms to plan. Real-time response to a rapidly changing environment is the need of the hour.
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, growth potential, to navigate through these uncertain times, and to build long-term value for stakeholders.
Have a plan or perish
A question may arise in readers’ minds 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 a plummeting top line and a declining bottom line. Organisations that prepare themselves are better equipped to perform during turbulent times. So, we must plan for plausible events and prepare alternate plans to tackle different outcomes.
The pandemic gave a chance to the entrepreneur to revisit each of their cost elements. Leaders should reallocate/redirect the flow of resources to areas of strategic importance and corollary to this decreased amount of effort and costs dedicated to non-strategic activities. Analysis of cost elements helps to identify wasteful expenditure and eliminate them. While analysing the entrepreneur must understand strategic costs that are necessary to achieve a company’s goal and strike only those costs which are not aligned with the company objective. It is important to manage the cost associated with different stakeholders (like Employees, Lender, Lessor, Creditors, Shareholders etc) without impacting the operations.
Zero-based budgeting (ZBB) can be used by companies. 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 organisation is analysed for its needs and costs.
Action Points: How an entrepreneur can manage some of the cost items
Employee Cost: Manpower cost is one of the biggest costs. More than the cost there is a humane angle to employee cost. If a company is finding it difficult to pay salaries then instead of a salary cut it can introduce a salary deferment plan. Alternatively, ESOP (Employee Stock options) can be issued.
Rent Cost: Negotiating a fixed-cum-variable pay with the lessor will help manage rent costs better. To maintain a constant positive gap between revenue and cost line innovative methods like converting fixed expenses into variable or semi-variable can be used.
Interest Cost: Retiring high-cost debts or linking interest rates to RBI’s repo rate will help reduce the interest cost as and when RBI announces rate cuts. Frequent communication with banks is a must to keep the interest rate and repo rates in sync. Improving the company’s credit rating by monitoring it continuously will help in the reduction of spread charged by the bank over repo rate.
In conclusion, an entrepreneur should plan their cost model for the upcoming period and monitor their cost elements regularly to avoid leakages and improve efficiency in the system. Do not disturb the strategic cost which disturbs current operations.
(Inputs by CA Abhay Nair)