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Cost Reduction Analysis & Why Your Business Needs It

Posted on 12/12/14 by admin

To the layman cost reduction analysis may sound like jargon. However, these words mean exactly what they suggest. Ordinarily, business entities incur a lot of costs in their day to day operation. Some of these costs include:

  • Rent of premises
  • Salaries to staff
  • Payment of utilities such as electricity, water and telephone usage
  • Licenses paid to local authorities
  • Taxes

Cost Cycle

For business novices, managers try to capture these costs as the business incurs them. They then compare the costs with the revenue generated from the sale of goods or services. If the revenue exceeds costs, the business reports a profit. On the other hand, if the business has incurred more costs than revenue, this is a loss. So let’s tell you something that you don’t already know.

The Need To Reduce Cost

The only way you can make more profits is by reducing the costs incurred. Some of these costs are difficult to cut. For example, business owners cannot wake up one day and decide to lay off staff. Likewise, a company cannot shut down one production sector just like that. In the commercial world, there are no hunches. Managers need to rely on past data to make future decisions.

Collection Of Cost Data

The best cost reduction approach is one backed up by data. For this reason, the management of a company must gather all details of expenses incurred. These expenses can fall in different categories depending on the areas they have arisen from. For instance, salaries, commissions and bonuses should fall under administrative expenses. Capturing all other costs should use this approach.

Performing Cost Analysis

Businesses should analyse their costs over a certain period of time. An analysis of costs incurred in a month may not be sufficient. You need historical data for comparison purposes. Once the data is in place, senior management can sit down and brainstorm on ways of reducing costs.

Hire Cost Consultants

There are business cost management services which specialise in cost analysis and reduction. In most cases, it is always advisable to have a second opinion. The beauty with hiring cost reduction consultants is that they will give you an unbiased view about the business. They can then recommend a series of approaches that your business can use in order to reduce costs.

Cost reduction is not a one month affair. You need to do it consistently. The profitability and survival of your business depends on it. You should make cost reduction analysis part of an organization’s culture.