Lessons from Troubled Companies - 3 and 4

LESSON 3 - CONTROLLING COSTS

Controlling costs is usually the most effective and quickest method of increasing profitability in any company. Reducing manufacturing costs and inventory purchase costs, as well as reducing operating costs increases profits dollar for dollar. A dollar increase in sales is discounted by the Cost of Goods Sold before it improves profitability.

Budgeting is the only sure method to controlling costs. Study the cost data and its drivers for every manufacturing, purchasing, and operating account or category. Conduct a consistent monthly evaluation of cost variances, actual to budget, and study their cause and effect. Use this data for future action items or increased accuracy in planning.

Lean and efficient companies are process oriented. All repetitive tasks (actions) should be incorporated into standardized Standard Operating Procedures (SOPs) that can be measured with Key Performance Indicators (KPIs). These KPIs need to be monitored daily, weekly, and monthly to provide assurance that costs are under control. This allows for immediate action to stop the cash burn when performance is outside the acceptable range.

Utilizing technology is becoming the favored method of reducing costs. Technology utilization can improve processes with streamlined data capture, processing, and reporting the right information, processed within approved methods, and reported in a user-friendly, consistent and timely manner. Technology also improves employee productivity by eliminating unnecessary steps and in turn reducing unnecessary staff and payroll costs.

The most cost effective companies have developed a lean culture to reduce spending on anything unless it is necessary to provide quality products or service.

LESSON 4 - FIXED ASSETS AND INVENTORY

Fixed Assets and Inventory make up the largest dollar investment for most companies. Unfortunately, too many business leaders do not focus enough attention on the Return On these Assets (ROA).

Accounting systems should be in place to report the profit earned from these assets individually and as a category.

When the management team repeatedly studies ROA, they will be able to determine any action that may be necessary such as reducing inventory levels, securing new outlets for excess inventory, quicker manufacturing cycles, and changing the inventory mix to increase those with higher ROA.

In respect to fixed assets, a CAPEX budget should be a component of every company's business plan. The CAPEX budget begins with the line managers creating a list and estimated cost of new machines or equipment (or major repairs) they believe are necessary to maintain or improve quality, service, or cost reduction through efficiency gains. Most companies only have a limited amount of funds available for CAPEX one year ahead, so the focus on ROA will ensure better decision making with facility and equipment investments.

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