Business recovery and cost reduction in a post Covid-19 lockdown economy
Published: 13th May 2020
Most companies' disaster recovery plans didn't make provision for a virus-inspired national lockdown. Many companies, across all industries, have a business continuity plan of some sort, but this time they got punched in the face and caught with their pants down.
Protection of profits and defending the bottom line is now more imperative than ever before. Stabilising the business and stopping the haemorrhaging should by now have all the attention of business owners and business managers.
Cost reduction in a post Covid-19 economy must be high on the priority list of business owners. Business expenses must be aligned to the now-reduced revenue levels of companies. Having lost almost 2 months of revenue in March and April, on top of a slow economy from January 2020, linked to a slow phased approach to reintegration of companies into the national economy from 1 May 2020. This implies, going forward, trading conditions will be tough and therefore downward cost alignment is required.
Now is the time for business owners to analyse and review their value chains, evaluate customer profitability, assess product profitability, identify the major cost drivers and do general value analysis. Management methodology and practices, sales models and service delivery models all have to be adjusted towards restricted trading conditions and loss of revenue.
In order to achieve noticeable change with a durable and lasting impact on the performance of the business, decisions have to be made sooner than later. Business owners have to realise that they are now working against the compression of time and with fewer cash resources available to cross-subsidise loss-making units or non-contributing units in the business.
It is important to note that larger savings are achieved in the longer term, but also that irrational cost cutting for short-term benefits could harm the business as a whole in the medium to longer term.
Business processes run in parallel, so therefore business managers and business owners should not look at cost savings in isolation from sales improvement and price adjustments etc. They all work together, price adjustment, cost reduction and increase of sales volumes all lead to business performance improvement. In addition, look for savings in interdepartmental costs and reduce the internal costs incurred between business units in the business.
As a starter, business owners and managers need to concentrate on the obvious first, then work their way towards finding further measures to pursue growth, reduce costs and secure profitability. The obvious would be to cut the salaries and wages bill, reduce rental costs and other running costs of the business, change the business model and organisational structure, change the operating management system and methodology, evaluate managerial effectiveness and install tight budget awareness with staff throughout the company.
The next level of turnaround and business improvement strategies is found in buying certain services from outside and reducing internal costs related to product development, data processing, accounting, graphics, public relations, social media, market statistics and business intelligence, HR management, advertising etc. These are mostly non-core functions, but important functions.
In addition to the above measures, business owners should conduct a management audit of all internal business processes, internal control procedures, managerial competence, staff skills sets and information requirements. Informed management decisions can only be made once the gap is identified between what the business now requires and what is available to the business in order to achieve predetermined trading objectives.
Business owners should take each department, one at a time, work through its cost structure and look for further opportunities to save costs and improve profitability. Cost structures that were acceptable before Covid-19 lockdown, might not be acceptable in relation to the current reality.
In the accounts department, look for ways to do faster reconciliations on financial accounts, automated bank reconciliations, automated updating of debtor accounts, find innovative ways to do stock counts and inventory valuations, review costing practices and identify wastage contributors in the department. Negotiate favourable credit terms with suppliers, revisit asset valuations with a view to improve borrowing capacity if so required, pursue overdue customer accounts, delay payments to suppliers and creditors where possible, speed up cash to cash management practices, reduce costs in the department in general such as salaries and other luxury non-value adding type costs. Cash handling is costly, so business owners should find ways to minimise cash deposit fees and bank costs. Negotiate new fee structures with banks, pay cash collections to the supplier’s bank account or pay cash on delivery to suppliers.
In the procurement office, look for ways to streamline business processes and purchase decision making, improve supplier relations, implement supplier rotation to force pricing down, implement a system of supplier review based on delivery time, quality and price, reduce level of risk in fraud and theft and cost each customer order for contribution to the bottom line. Engage with key suppliers to explore cost saving options, take advantage of settlement discounts and negotiate terms with each purchase. Buy in bulk from suppliers and negotiate bulk pricing, take delivery only when required to reduce incoming material costs and monthly payments. Short of coercion and inducement, be firm with supplier engagements to set the tone going forward to ensure future savings. Speed up order processing in general, request quotations and spend less time and labour per order. The practice of quotations reduces prices and get suppliers bidding at better price points for your order.
On the production front, waste is a big loss-making contributor and erodes profit margins. Reduce the waste factor and add to the bottom line with little extra effort. After all, producing waste costs the same as producing a sellable product. In the production environment, one should be looking for ways to improve quality, reduce cost and manage time. As a rule, no overtime should be allowed in the production area as this adds additional labour costs to the production of items which was not costed for. Limit or minimise disruptions to workflow and manage standard minute allocations for processes, eliminate rework and slow performance of line workers. Reduce working space required and condense operations, reduce labour costs (less people or less rands paid out to wages), change old plant and equipment for new equipment to improve efficiencies, eliminate idle time and waiting periods, reduce changeover times and cut plant costs in general. Establish standards of performance in the production unit and measure performance on a regular basis. Reduce fixed costs and replace with flexible costs where possible. Review employment contracts and align to orders with fixed term contracts. Stockholding should be reduced, let the supplier carry the cost of inventory holding. In the production area, implement a system of short interval controls, set targets for each interval and measure production at each interval to ensure no surprises at the end of a shift.
On the sales front, business owners should reduce sales unit costs such as cost of a single sales agent made up of expensive cars, laptops and cell phones together with a range of allowances. The same results could be achieved with less input costs. Monitor sales efficiencies and be strict on cost validations and making sales targets. Find alternative means of lead generation and improve conversion ratio between leads and deals concluded. Eliminate poor profit producers. Develop new sales techniques, review current sales channels for efficiencies and find ways to improve sales channel performances. Reduce the levels of engagement by sales people with unqualified leads, reduce engagement with wasteful unwelcome customers, focus on key accounts and long-term relationships. Find ways to raise volume per order with cross selling and upselling techniques. Do not allow customer discounts, collect the full price, but be reasonable and provide other incentives at a lower cost to company. Improve sales training of staff to improve performance levels and focus their efforts on more profitable products or services.
Marketing and advertising costs should be adjusted downward to cost less in general and achieve more traction. Use social media, word of mouth, customer referrals and other online technologies more often. Cut advertising material production costs and find alternative ways to produce advertising materials. Improve market information and develop market segmentation towards focussed spending of a tight budget.
Product distribution and logistics offer many more opportunities for cost reduction to business owners. Reduce the number of distribution points and focus on central storage of finished goods, thereby reducing warehouse rental costs. Simplify distribution, plan routes more extensively, implement fuel management systems in delivery vehicles, monitor driver driving behaviours and incentivise drivers. Improve materials handling with the use of technology for automated handling and by implication reduce labour costs. Use fewer vehicles, bigger load capacity, longer life spans etc. Further, reduce operating costs by considering outsourcing deliveries, contract hire vehicles and introduce customer collections. Compare off balance sheet funding of delivery vehicles with debt financing of vehicles, choose the lessor option. Refinance vehicles to raise funding where necessary.
Reduction in capital expenditure should be high on the agenda of business owners, unless it produces revenue and/or reduce operating costs. Plant and equipment should be considered not only for improvement in production efficiencies, but also for electricity consumption. Change light bulbs to energy efficient lights, use lights sparingly and consider the use of alternative energy solutions. Non-core assets could be sold off to raise funding for other areas in the business.
Office cost such as printers, photocopiers, stationery, consumables etc should be reduced to what is really required. Control access to photocopiers and printing costs and plan printer stations for improved use. Measure cost per copy and reduce overall costs related to office consumables in general. Allocating budgets for these expenses is important.
Payroll creep should be monitored, replace outgoing staff with lower salaried incoming people of the same or similar profiles. Freeze salary increments and review monetary incentives and non-monetary incentives. Place a moratorium on filling vacant positions where possible and put a hold on new roles being created in the company.
At shareholder levels, reduce or freeze dividend payments and retain the cash in the business to improve cash flow.
In order to stay in control of company expenditure and other financial commitments incurred by the company on a day-to-day basis, process owners must be appointed. Department heads must control expenditure, make informed decisions and understand the impact of their decisions on the entire company. Processes need to be adjusted to deliver the new cost saving requirements of the company.
In conclusion, profit is not something you add on at the end. It is something to plan for in the beginning. The secret to making profit is by avoiding costs. Well planned cost reduction strategies imply generating profit through savings, thereby adding shareholding value in a post Covid-19 economy.
About the author
JJ Oosthuysen is the founder and owner of GO-Hi Consulting, a boutique size turnaround management practice that assists companies in distress. His work experience is in excess of 35 years in numerous capacities, including being MD of a financial services company, serving on various boards of directors and being interim CEO of a number of companies. He has more than 15 years’ experience in turnaround management. Over the years he received a number of business awards in recognition of his resourceful contribution to the business world. He is an accredited professional turnaround practitioner and active member of the Turnaround Management Association SA.