Efficient monitoring; optimisation and management of business expenses is essential; even more so for companies that; for one reason or another; cannot devote time and resources to accurate and meticulous expense management. I am referring in particular to companies that fall into these categories or that are experiencing a phase in their development that falls into one or more of these cases:
- Start-ups
- Companies that have grown rapidly in a short period of time
- Extremely operational companies
- Family-run companies
- Companies without a purchasing department
- Companies heavily involved in a core and critical project
- Companies with significant change management issues
- Companies committed to resolving major order/turnover issues
Unfortunately; the last point sounds very familiar and highly relevant today. The best option and course of action for these companies would undoubtedly be to engage a consulting firm with extensive experience in optimising fixed; general and indirect expenses; but this is not always possible. Is there nothing left for these companies but to face the abyss? Certainly not. Let's look at some useful suggestions.
1. TRACK AND CATALOGUE EXPENSES AT EVERY ORGANISATIONAL LEVEL
Some of my most avid followers on LinkedIn know of my fanaticism for Peter Drucker; considered by many to be the founder of modern business management. To quote one of his famous maxims: "If you can't measure it; you can't manage it"; the first point I would like to suggest stems from this very idea. However; I would like to go deeper than simply recommending that company expenses be tracked with meticulous precision. My key suggestion is that this activity should not remain at the level of the finance and/or administration department; the area manager or the district manager. Group managers should devote sufficient time and energy to investing in their people; teaching each resource how to track the business expenses for which they are responsible. These may be expenses related to the quality department; the travel & transportation department; general services; or IT. The department manager should explain to the team why this is important; how to categorise expenses; and how to understand which ones can be reduced or eliminated. You will be surprised at how involved your employees will feel in this process; generating ideas to further optimise costs. And the department manager will finally have a cost area under control and one more reason to reward the most deserving employees. This simple action; therefore; brings numerous interconnected benefits to the organization:
- Control and optimisation of expenses;
- Reduction of waste;
- Empowerment of your resources;
- A real basis on which to convey a rewarding action.
2. TAKE ADVANTAGE OF TECHNOLOGY; WHICH IS OUR FRIEND
The most modernly organized companies use ERP and/or other systems which; thanks to specific or completely dedicated modules; allow the entire purchasing process to be tracked. Some companies; however; either by choice or for other reasons; do not use these dedicated and sophisticated systems. At the opposite extreme is the good old Excel spreadsheet; or even compatible software. Between these two extremes; there is a whole range of tools that are either free or freemium (i.e. free for the main functions and paid for depending on the more advanced options you intend to use; even at a later date). My suggestion is to test one or more of these applications and; in relation to what was said in the previous point; ensure that all levels of the organization use them. In this case; it will be important to agree on the tool to be used; so that different departments use the same tool. This will facilitate teamwork and the subsequent comparison of data between different departments by the administrative department. It is easy to find examples of these packages by searching Google using keywords such as 'Free expense management software'; 'Free cost management templates' and so on.
3. CATALOGUE FROM THE TOP DOWN
The third suggestion is to catalogue expenses not only by type – for example; 'Travel Expenses'; 'Material Shipping' and so on – but above all to create the first macro-level of grouping; dividing them into:
- Fixed or Variable Expenses
- Expenses related to a product (production expenses) or General/Administrative Expenses
It will therefore be important to implement the most appropriate strategy to minimise fixed expenses in favour of variable expenses (or transform fixed expenses into variable expenses) and similarly reduce as much as possible general and administrative expenses that are not specifically related to the production of a good or service. There is no precise rule that applies in every situation to achieve this change; so this suggestion should be understood as a general guideline. It is not possible to determine in advance whether it is absolutely better for a specific company to have more variable or fixed costs (and by how much); but the general concept of preferring variable expenditure over fixed expenditure is often the basis for running a company with a more constant gross operating margin; i.e. with fewer fluctuations dictated by variations in production.
4. CONSIDER EACH PRODUCT OR SERVICE IN THE LIGHT OF MAKE OR BUY
This choice; which will become strategic; will lead to a decision for each product or service provided by the company (or used by it as part of its value chain) as to whether it is better to produce it internally or purchase it – entirely or partially – externally. The considerations underlying the assessment will be different; not only for each company involved; but even for each product and service of the same company. In this context; I do not intend to suggest what is best to do (it is not possible to do so here!); but rather to point out that part of the assessment will be made in quantitative terms. In other words; it will be necessary to understand and calculate what investments will be required to produce internally and what costs will be incurred to purchase externally what needs to be outsourced. The reason why this strategic decision is closely linked to cost optimisation can be summarised as follows:
- The optimisation of company costs will lead to the possibility of freeing up additional economic resources; which can then be used for the investments necessary for 'making'.
- Optimising fixed; general and indirect business costs will lead to the best possible choice of partner for business supplies; making it more cost-effective to outsource a product or service so that the company can focus on its core activities.
Therefore; the decision between 'make' or 'buy' will not only be linked to the brand and actual or perceived quality; nor will it be solely a question of pure production cost; but must also be considered in quantitative terms; depending on the company's ability to optimise its costs and choose the suppliers that offer the best value for money on the market.
Andrea Gatti is a professional with more than 20 years of experience in modern; technology-oriented companies; for which he has worked in Italy; Europe and the United States.
