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94 Ideas For Cost Reduction And Profit Improvement
Introduction to 94 Ideas for Cost Reduction and Profit Improvement
â€œDo you want to know 50 great profit building ideas that you can put to immediate use in your business to increase profits and reduce costs?â€
If YES read all these ideas that have been implemented by clients and have benefited them giving their businesses dramatic boost in profitability. Most ideas can be put to action immediately. Each idea has the potential to give you many %points increase in net profits.
Research shows profits increase by 4%-56% and costs reduce by 18%-37% within 2 years using the simple 5 step process called the Profit Maps Model. Usually a 5% reduction in cost is adequate to turnaround most loss making businesses.
Businesses can calculate the value of the savings by these 2 simple formulas
If the business made a loss
Total Costs and Expenses = sales + absolute value of net loss +/- income tax = say X
Minimum Savings you will make in 2 years = 5% of X (which was calculated above)
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
If the business made a profit
Total Costs and Expenses = sales + net profit +/- income tax = say Y
Minimum Savings you will make in 2 years = 5% of Y (which was calculated above)
So how much can you save? Improve your profits by?
General Tips about Profit Improvement and Cost Reduction
- Recycle and reuse. The plastic bags, envelops and other packaging from your suppliers make good trash bags. Another example is to use standard envelops with boxes printed on the face of these envelops where you provide information for internal mail circulation. When received, the recipient can again reuse it to send his or her mail to another internal employer.
- How about saving and reusing photocopy papers or printing where there were errors in the photocopied or printed document. If it does not contain confidential information these wasted papers can be used for writing or scribbling notes by staff than using new notebooks and notepads. Ideally stop buying new notebooks and notepads. You save costs and the environment.
- Learn to photocopy and print on both sides of the paper. Buy photocopiers and printers that can do this with ease and bring in a company policy requesting all staff to photocopy on both sides of the paper.
- Insulation for your roof, attic and walls (including outer wall electrical outlets) will absolutely save you money over time. Much of this, you can do yourself. While you are at it, check the weather stripping around the doors to the outside; if you can see daylight between the door and frame -- purchase a roll of adhesive foam door seal and close those cracks.
- Consider investing in reusable items. Rechargeable batteries are a good option if your battery consumption is high â€“ the question you should ask yourself is: why is your battery consumption high and what can be done to reduce that?
- Have a no smoking policy or reduced smoke-time. Many staff members spend a lot of time outside office in designated smoking areas. Sometimes other staff members accompany them jointly wasting a lot of productive time.
- Limit alcohol at company premises and functions. Alcohol is an added expense you may be able to eliminate altogether, or at least significantly reduce.
- Stop gambling within your organization such as staff getting together and pooling funds for Lotto and footy tipping! These are personal acts of staff during company time.
- Stop using paper napkins and paper towels. Cloth towels are more absorbent and can be used over and over again. They also clean much better than paper.
- Think about every purchase before you make it. Ask yourself whether you need it or simply want it. Do you already own something that will perform the same task? Is it of good quality or needs replacing after a few uses? Most importantly, are you willing to put off your profit improvement and cost reduction goals to have it? If an item is superfluous, just say no.
- Use the 24 hour rule. Wait 24 hours before making the purchase for non-critical items.
- If you subscribe to non-essential services, like satellite radio, prepare yourself mentally to cancel the service and then call their accounting department. Advise them that you are cancelling - they will transfer you to several people but each time tell them the truth - you want to cancel because you cannot afford the service. If you persist, they will offer you a discount - a substantial discount - to continue service because it is much cheaper for them to keep a customer than to obtain a new one. If they won't give you a discount - cancel the service and do without it while you save some money.
Warnings about Profit Improvement and Cost Reduction
- Do not only consider the least expensive option â€“ that is certainly not always the best option. Many, many times, an initial savings will cost you more later on. Carefully consider life cycle cost in addition to the acquisition cost.
- If you buy pre-owned, check carefullyâ€¦ this is especially true of cars. Itâ€™s worth the investment to have a mechanic check the car (unless youâ€™re perfectly competent in that area â€“ are you sure?).
- Donâ€™t go completely overboard. Itâ€™s great to be frugal; itâ€™s not great to be a mean-spirited miser. If staff needs something definitely look for bargains but keep your priorities straight.
Telephones and Communication
- When it comes to telephones consider consolidating all your landlines, voice over IP and your cell phones. In this way you will be able to rationalise the number of lines and methods of communication and be reducing costs. You can also use the rationalised list to negotiate with your service provider or its competitors to obtain better prices.
- When it comes to cell phones consider if most staff members require it. Again consider rationalising it to staff members who work at outside locations and need to be contacted by head office or vice versa.
- When cell phones are provided have clear rules on usage. Any violation of this must be charged to the employee and recovered from their pay.
- Consider texting or sending short service messages or e-mails to staff in foreign locations or those who may be travelling abroad with whom you may want to communicate.
- Consider using voice over IP such as Skype or gchat from Google. For example Skype charges AUD 4.00 for unlimited calls to any phone or mobile in Australia per month. Whereas Optus charges AUD 109.00 per month for the same privilege.
- Cable television- consider if this is necessary for your company. Rather than having special cable television in your lobby it may be a good idea to use preview. Â Your customers or suppliers who use your lobby would not seek to view complete shows or movies that are shown on cable television during their office hours.
Understand your traffic patterns and what you spend better than what your telephone company knows or tells you. Many businesses rely on their carrier to tell them what to do. This is ill-advised and reflects laziness on the part of the person making the determination. Given the choice, a telecom carrier will always sell you a gold plated Mercedes, whether you need it or not, on a 50 year lease, which only increases in cost every year, that you can never get rid of, even after the wheels have long fallen off. Don't fall for this trap. You make the rules. It's your money!
Package your services into something that you can explain to the carrier market in their terms. Measure service by origination, type, distance, and per unit expense. Roll it all up from perfect granularity to absolute 100,000 foot level.
Identify the minimum level of service that is required to meet the needs of your organization. This doesn't mean cheap, it means that the combination of services you buy should exactly meet your needs, being neither greater than, nor less than your needs. You don't have to pay for widgets you can't use, and you don't want your users to go without services which are critical to the success of your business.
Identify the carriers that provide service in the locations where you originate a need for service. For instance, it doesn't matter if XYZ carrier has nationwide service to major cities, if your main city is not on their list. Get market comps from reliable sources. The carriers may be telling you the best rate is a nickel, while other may be paying a penny, and they will never enlighten you beyond that which they need to. Other top performing end users probably have the best rate information, which you can informally exchange. Be sure not to just look at the leading rates that are generally followed, but look at the entire list of services. Recognize that the largest companies with the highest volume do not necessarily pay the best rates. They often suffer from ossified contracts that have been carried forward after far too many "good guy deals" have been cut. Carriers will always be quick to cite others who are paying more money than you are. Don't worry; they only cite the higher ones, keeping the ones getting a good deal private.
Invite every carrier to compete for your business that has even the slightest chance of winning your business. Even if itâ€™s just a single circuit. The more the better. Don't invite carriers who you wouldn't seriously consider giving business to, which is called using "stalking horses." If you do this, the market won't respect you. Don't give any one carrier any advantage that every other carrier is not getting. Make it fair. Use a level playing field. Make everyone compete using the same information, released at the same time, and under the same rules. Don't give anyone more time than you could perform within. Open the information from all of the carriers in private, sharing it with the minimum number of internal people required to do the work. The more people that know of your internal influences, the more they will share it with the market, and not to your benefit.
Set the pace. Your incumbent carrier will use excuse after excuse to slow down the process. Why should they help you speed the process which will only result in their having to write down part of the fat profits they are making on your business? This is not a time to get nostalgic. Set your terms, your timing, and award to the carriers who earn your business. Not in the past. In the present. Once you have tentatively identified a carrier, make sure to come up with a list of 2 or 3 others that can also suffice. Never tell any carrier what the outcome is until you have your contracts signed. Itâ€™s a very small vendor community, and your information will be shared (again to your detriment) if you disclose it before the deal is done.
- Measure everything and report your margin of success to your executives to they can understand your performance.
IT Department Telecommunication Cost
- Your IT department should save on systems connectivity costs, including WAN circuits, T1-type services, and other telecom services used for remote office connectivity.
- Identification of costs - Prepare a physical report listing all of your data line, circuits, etc., in place for remote office connectivity. Include information that will help you evaluate the service for appropriate need later, such as location, bandwidth, and number of users at the location. Conduct an inventory of all telecom expenses from your recent telecom carrier invoices. Telecom expenses can be as high as 1 to 2 percent of revenue or more depending on the makeup of your company. Office changes, growth by acquisition, and other issues can create situations where there is "low-hanging fruit" by inspecting what you're paying for. Reconcile the invoice detail with the telecom connectivity inventory list created in the first step. That is, compare what you think you have with what you are getting charged for. For large companies or even small ones with many offices, this is no small feat. So prepare yourself for an intense project or seek outside help from those who deal with telecom invoices for a living.
- Total up the circuits/lines that are no longer in use or that can be eliminated. Measure this along with the savings potential you have by reducing the bandwidth of certain remote office services while still providing adequate response time.
- Savings opportunity exists in: Lines, circuits no longer used or needed, ability to consolidate remote operation services, ability to reduce bandwidth while maintaining acceptable processing speeds.
- High-growth companies with many offices often have dormant services in place or more capacity than needed in many locations. Also if you aren't reconciling your data-related invoices, you're almost always overpaying.
- There are many companies that focus on identifying and recovering costs for your company. One of the benefits is that, these companies pay or fee is based on the results of the dollars recovered or saved. Its approach helps a company in three ways: analysing past charges and recouping overpayments. This can be up to a year or more of overpayments and can be a tangible amount depending on your environment and company history; reviewing contracts and negotiating with vendors to establish appropriate-use contracts; evaluating your current telecom needs and recommending cost-effective solutions.
Heating and Cooling
- In many parts of the world and Australia in particular during summertime the temperature increases to soaring limits. It may be a good idea at this time to harvest solar energy and use it for your heating and cooling needs. The government also provides many incentives and rebates are changing over to solar energy usage.
- During the hot summer season it may be a good idea to change working hours so that your employees who work in certain worksites and factory area where the temperature rises to very high levels can start early and finish before the temperature rises. Alternatively major work can take place during the night shift.
- Install ceiling fans where possible. This was the means used before air-conditioners came. This is an excellent way to save on heating and cooling costs.
- Open the windows. Unfortunately in many office buildings it is not possible to open the windows since it has been sealed externally. These buildings depend on electricity to maintain the temperature within and for lighting needs. Arranging to open the windows will reduce not only your heating costs but also lighting.
- If your heating system works by gas you may be able to speak to your service provider and request a shut off during the warmer months. This will help you to save on fixed costs. If this is not possible you may be able to sign up for a pay as you use package.
- Use energy efficient bulbs. Again the government provides many incentives and rebates reducing the overall costs of these energy-efficient bulbs.
- Install systems and methods where light bulbs in certain areas are switched off automatically. I have seen in certain areas where security lights or floodlights are switched on during the nights and forgotten to be switched off in the mornings. Having a system that switches off Â the power supply to these security or floodlights during the day makes the system automatic and saves substantially on electricity as these lights consume a huge amount of electricity.
- Request and educate your staff to shut off and switch of all electrical equipment and laptops before they leave office at the end of the work day. Many people do not switch off electrical equipment and laptops when not in use. The main reason for this may be convenience to them but not to the business. Routine checks must be made to ensure that this policy is adhered to. This not only saves on electricity but also reduces risks of electrical fires when staff is not available to handle them.
- Request and educate your staff to only use electricity when absolutely necessary. Many offices can use natural lights during certain seasons and times of the day. This is also true when you open the window to regulate your internal environment and its temperature.
- In certain work areas workers have a shower before the commencement of work or after the completion of work. Where shower facilities are provided use shower reduction kits. Again such shower reduction kits are provided by the government and if not many incentives are available for using them.
- Request and educate your workers to limit shower time.
- If your toilets and commodes do not have two buttons for half flush and full flush change or install them. This will save substantial amounts of water during the year or on a long-term basis.
- Gentlemen's restrooms should be fitted with adequate urinals. This again stops water being flushed down toilets and commodes.
- Wherever possible use water-saving cubes in urinals. This is a new invention where you do not have to use water as the cubes are capable of purifying the environment and urinals by using odour killing chemicals and bacteria.
- Use taps which stop automatically after dispersing a limited amount of water. This is a good idea where you have people washing their hands in public toilets. If more water is required all that you require is to push a button. This tops excess water usage and leakage.
- Where possible use waterless hand sanitizers.
- Repair leaking toilets and faucets.
- Use mulch and other and water reducing systems for your office lawn such as drip systems and providing additional shades to reduce evaporation.
- Reduce the duration of watering and the number of days that you do it weekly.
- If your business uses water filled in open tanks, use covers to provide additional shade to reduce evaporation. Some companies have swimming pools in recreational buildings which may require the same treatment.
- Learn to harvest rainwater and save them in huge tanks. You will be able to use this and save a ridiculously large amount of cash you spend on water.
- Stop providing free tickets and corporate boxes for many sports events or other at functions and activities.
- When senior staff members have food and entertainment allowances fix daily limits.
- Even when senior staff members may have food and entertainment allowances have clearly defined policy on how the money can be spent and also for what purposes it can be spent on.
- Request and educate staff not to order food by delivery or room service.
- The company must have a system where the staff member first uses his/her personal credit card for food and entertainment which will then be reimbursed by the company on actual bills. If the staff member is unable to provide the proper supporting documents and bills Â or has spent on items which are not allowed by company policy that payment will be withheld or paid net.
- Stop buying or rationalize buying the daily newspapers, magazines, periodicals and books for management and staff to browse and enjoy during office hours.
- Do not order fresh flowers for every manager in the office. You may use fresh flowers in the main reception or lobby area and even better if you can use natural looking artificial flowers and flower arrangements which are kept clean and free of dust.
- If the company provides annual trips to all members of staff it must be provided on the basis of costs reduced or profits improved during the particular year. For example you may be able to tell your staff that if certain costs are reduced by 20% they would be rewarded by this particular company trip. If this does not happen you do not have to spend that money. However if staff is able to reduce costs as requested , you win anyways
- Certain companies have the habit of taking their key management to exotic locations in faraway places for a few days to brainstorm and develop corporate strategies. Whilst I do not condemn this great idea it may be best to reduce the cost by having fewer days with a tight agenda and less travelling to do.
Purchase of Assets and Their Usage
- Many departments buy new furniture and equipment whenever the need arises or if within budget limited without further thinking. Before you decide to buy new items look carefully at the furniture and equipment that may be in your storage. This is quite possible when many organisations today closedown facilities and dump the furniture and equipment in storage facilities. To do is effectively however you would need the support of your accounts staff who must keep track of all the fixed assets and have full control of its movement.
- Before purchasing assets it may be a good idea to ask other departments or other strategic business units if they have such assets and you could purchase them at reduce costs, or maybe even share them. This will not only save money for your department but will also help the selling department or the sharing department to reduce its own costs.
- If you're a small start-up company you may be able to buy most of your assets from garage sales or closedown auctions. Even if you had to spend a little extra on refurbishing and cleaning it up you would be able to save substantially on them.
- Another option which most companies consider now is to buy from online auctions stores such as eBay.com and overstock.com
Food and Drinks
- Reduce variety for coffees, tea and milk purchased for staff use. Many companies are in the habit of buying different types and brands of coffee, exotic and different blends of tea and milk to cater to the fancies of each and every staff member. When you do this the company will incur extra costs in buying small quantities of a large variety of items. You may be able to ask for staff suggestions before you make the switch. Practise variety reduction at every level.
- Always have limits to individual orders. Do not buy large quantities or bulk. Only buy what is required for, maybe a week or two. This will not only reduce pilferage but also spoilage which is quite possible as certain food and drink items have expiry dates.
- Eliminate certain items from your food and drinks lists such as free biscuits, fruits, nuts, soft drink and soda for your staff.
- Install a water purification system for drinking water rather than ordering bottled water. Maintain the purification system in good working order.
- If your company has a tradition of providing free breakfast on certain days of the month or a barbecue it is a good idea to limit the number of days this is done on a month. Also have a fixed limit on how much the staff can spend on these occasions.
Automobiles and Related Costs
- Request your staff to always consider, â€œis this trip really necessary?â€ When they ask this question they may be able to look at other options such as sending the product or package by courier, delivering it at the stated location on their way home etc.
- Request staff to work together to consolidate trips or to reduce additional trips made during the day. I have seen staff from various departments travelling to a particular site at the same time in different vehicles. Worst of all you will see that each department has its own vehicle for such trips. Not only do you see this happening between departments but you will also notice this amongst staff working in a particular department. Staff members may go to a particular location but they do not plan or organise the at times together so they may be able to do that by sharing a trip. For example to particular staff member may be leaving to a customer location at eight o'clock and another member leaving 10 minutes later to a location in the same route. Of course I understand that is not possible all the time. However what is important to note is currently there is no active method of planning and organising visits to work locations.
- Always check the tyre pressure of your vehicle. Check spark plugs. Use new or good quality oil for the vehicles. All these steps will reduce the cost of maintenance and running.
- Consider keeping a log and monitoring how often and how far you drive each and every business vehicle. In this way you will be able to negotiate reduced insurance.
- Less driving of vehicles also saves costs on maintenance, tyres, consumables and fuel.
- Request and educate staff to change their driving styles to an ideal speed and to be less aggressive in driving. This again would save on vehicle maintenance, consumables and fuel.
- Staff who travel long distances should be given special or advanced driving lessons. Accidents happen which can cost the company a lot of money and staff lives. Put limits on the amount of driving hours allowed during a 24 hour period.
Staffing Costs-Getting More without Adding Costs
The productivity factor- Obviously, one of the ways any manager can accomplish more with existing resources is to improve the productivity of those resources. Improving your staff's productivity is an ongoing effort and one that's important for the employee, your company, and for you as a manager.
Train and develop your employeesâ€”Target specific training opportunities for each employee that helps him or her do more. The training can be internal programs that cost little to nothing other than time from one of your senior people. Or, you can use outside vendor programs that can teach specific skills to the employee that improve his or her production capability.
Coach and focus employee effortsâ€”Too often, we allow our employees to "find their own way." Being more proactive in delineating employee responsibilities, focusing their efforts on important tasks, and coaching them for higher productivity is a good thing. Expect higher productivity and you will often get it.
Give them toolsâ€”Our employees want to be productive and to produce quality results. Invest in your employees by giving them the tools that boost their productivity.
Incorporate a quality improvement programâ€”Often employee productivity is hampered by poor quality in the delivery of their efforts. More than not, they can't see the problem; it's the "can't see the forest for the trees" issue. For example, if your programming staff Â has to fix lots of problems that are discovered after software enhancements are put into production, you have both a client service problem and a productivity problem. Every time I have implemented a quality improvement program, I have met resistance from my senior people. Only after showing them the numbers before and after the quality program do they actually believe it improves the team's output.
Give extra incentives for more workâ€”In a couple of situations you have Â an inordinate amount of backlog, need Â to reduce the backlog level, but donâ€™t want to hire more people. To attack the problem, offer staff incentives to work on extra projects "on their own time," which meant outside of normal hours. This type of program can be very effective, but you have to be careful to avoid creating an impression that you are paying for overtime. Hourly people get overtime, not professionals. You also only want to authorize the additional work to those who are doing an acceptable job; in other words, the way to qualify for the incentive work is by doing your normal job well. Use a program like this only in short spurts, say three to five months, versus allowing it to become a normal work program.
The perception factor -Improving your staff's productivity can actually be accomplished by changing the perception of the team's productivity. I'm not advocating any type of deception, but there are things you can do to make the team appear to be more productive.
Organize for client service â€”Create a structure and implement processes that help your employees quantify issues, implement change in an orderly manner, escalate appropriate issues, and follow up consistently. Improving client service automatically makes your team appear to be more productive.
Manage client expectations to your capacityâ€”If your team is overcommitted to the capacity of what they can deliver, the natural conclusion will be that they're not getting the job done. Manage your client's expectations to your team's actual capacity for delivery and it will appear that the team is more productive. We should be managing this way anyway, but it's easy to get overcommitted.
Filter the request backlog in your departmentâ€”Review the requests coming into your department from stakeholders. Quite often, requests are made for items that are not necessary or that do not provide real value to the business. Reducing the backlog and establishing more stringent approval requirements for new requests can create a perception of improved response.
Over communicate â€”communicate the status of outstanding issues more than you have been. Nothing makes a customer feel more frustrated than not knowing the status of a support problem or outstanding request. Keeping your customers and users "in the light" creates a perception of being more productive and improves client service.
Over deliverâ€”Coach your staff to take the extra steps in supporting your stakeholders. Little extras go a long way toward improving service, and higher satisfaction creates an image of responsiveness and productivity.
Publish your team's accomplishmentsâ€”You might be surprised at how much we all forget about what we accomplish every month. It's so easy to get caught up in the day-to-day issues and problems that we forget to reflect on the things that were completed in the past. Start tracking your team's accomplishments and publish the highlights monthly. If we forget what we accomplish, I can guarantee that the customers don't know all the things we do. Share this knowledge with them, and you may find that customers really are interested and that their perspective of how busy you are in your department or business unit goes way up.
- Before you start trying to improve the productivity of your staff, conduct an assessment to determine how productive they already are. If possible, establish a baseline and measure the improvements as you implement specific actions that either improves your team's real productivity or the perception of its productivity. Capturing real data in key areas will help you substantiate whatâ€™s really happening.
The more you understand the power of this list, the more youâ€™ll realize you must get your hands on all the other ideas to benefit your business. Go to www.profitmaps.com.au to obtain and use a simple 5 step process that can do this for your business.Â Â
As mentioned each idea has the potential to increase your net profit margin by many % points. Research shows profits increase by 4%-56% and costs reduce by 18%-37% within 2 years. Usually a 5% reduction in cost is adequate to turnaround most loss making businesses.
To obtain the maximum benefit and ensure that the actions result in improving your bottom-line you need a structured methodology or a process on an on-going basis such as the 5 step process suggested in www.profitmaps.com.au.
About the Author
Skanda Kumarasingam was senior manager and professional primarily in general management and management accounting roles either with profit centre responsibility or in supporting senior managers with profit responsibilities. He has held management roles in KPMG (Audit and Consulting), Coke (Regional Internal Auditor and Leader- Financial Impact Teams in the Asian Region), PepsiCo, Marks and Spenser (UK) , Gap(Singapore), Next (Singapore) and Ernst and Young (Business Training Centre- Kingdom of Bahrain). Skanda has over 15 years experience in senior management and professional business training roles.Go to www.profitmaps.com.au to see more powerful ideas such as these.