Managing costs is crucial for any business, though the strategies for doing so can shift over time due to economic and logistical factors.
Earlier this year, Boston Consulting Group released a report titled The CEO’s Guide to Costs and Growth. It included findings from a survey of 600 C-suite executives, which revealed that cost management is a top priority for 2024. The survey highlighted three key areas for cost-cutting initiatives:
1. Supply Chain/Manufacturing
While not every company has manufacturing costs, most have a supply chain, which saw significant cost increases and delays during the pandemic due to global disruptions. Although some normalcy has returned, managing supply chain costs remains a challenge.
Many companies find that most of their spending is absorbed into a few vendors. By identifying these key vendors and consolidating how much you spend towards them, you can strengthen your position to negotiate volume discounts and streamline the administrative work involved in purchasing.
It's also beneficial to thoroughly understand your suppliers. Conducting a supplier audit—a formal process of gathering key data on each supplier’s performance—can help manage quality control and ensure a good return on investment.
2. Labor/Nonlabor Overhead
Managing labor costs is challenging in today’s environment, especially with many industries facing skilled labor shortages. While businesses are eager to invest in labor, it's essential to monitor payroll expenses, as they can be a significant cost for most companies.
The first step in managing labor costs is understanding your total spending. This goes beyond just gross wages—you need to consider the full scope of expenses, known as the labor burden rate. To get a clear picture of your labor burden rate, look at costs like: payroll taxes, workers’ compensation insurance, and fringe benefits.
Outsourcing is another option for controlling labor costs, particularly with the growing availability of independent contractors. Although outsourcing involves costs, the time and labor savings can result in a net gain. Similarly, well-chosen technology upgrades can help reduce labor expenses while maintaining efficiency.
3. Marketing/Sales
Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment.
Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value.
Whether you’re assessing sales metrics, labor burden rates, or supply chain management, objective, professional advice can provide your leadership team with a clear understanding of your costs and help you identify practical solutions. We would love to help your business analyze your costs. Book an appointment today!
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