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Strategy - Effectively managing expenses requires an understanding of the cost drivers within an organization. Expense management is not only about reducing existing costs, but also about prevention. Costs accumulate rapidly and non-essential goods and services can grow alongside essential and necessary expenses. Identification of hidden costs, understanding which costs are unnecessary, and knowing which costs are inflated is essential to reducing existing costs and preventing future expense problems.
Different industries have unique cost drivers and identify core and non-core expenses differently. Even within the same industry organizations can differ from one another in a number of ways: size; growth rate; strategy; profitability; structure, financial and organizational; planning; technology; knowledge and expertise, to name a few. Consequently, cost reduction strategies and actions will differ by organization.
Still, while each organization is unique, there are common factors that drive costs. While core and non-core will be different by organization, determining which costs are non-core follows a common theme. Typically, overhead costs are non-core. Costs associated with labour are usually non-core. Indirect expenses and fixed expenses tend to be non-core. Essentially, understanding Cost of Goods Sold (COGS) will help an organization filter out non-core from core.
However, many organizations are unaware that indirect expenses are often buried within COGS. The key is identifying these expenses and removing them from COGS. These are essentially, hidden costs. How an organization is structured can lead to confusion over core and non-core expenses. Departmental expenses may be bundled and accounted for under Selling, General & Administrative expenses (S, G & A). In other cases, overhead expenses may be lumped in under COGS.
Understanding how costs are organized and what drives these expenses, provides the organization with the information necessary to begin reducing specific expenses. From here, costs are more easily sorted into essential and non-essential costs. While it may seem counter-intuitive to believe an organization has ‘non-essential’ costs, it is actually very likely. Better understanding of expenses means the removal of ‘low hanging fruit’ and, better yet, the reduction of essential expenses.
The result is immediate. Depending on the organization, $1 saved is worth the equivalent of up to $10 in additional revenue. The impact is positive to both cash flow and the bottom line.
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