Controlling costs is fundamental for every business. However, the location and method of addressing this challenge can change over time based on various economic and logistical factors.
Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO's Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, that cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were supply chain/manufacturing, labor/nonlabor overhead, and marketing/sales.
Supply Chain and Manufacturing
Not every company incurs manufacturing costs, but most have a supply chain. Because of global disruptions and backups, costs and delays in this area soared during the pandemic. Since then, some sense of normalcy has returned, though that doesn't mean managing supply chain costs has become easy.
Many companies find that most of their spending is with just a few vendors. By identifying these vendors and consolidating spending with them, you may put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.
It also pays to know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier's performance to manage quality control and ensure you're getting an acceptable return on investment.
Labor/Nonlabor Overhead
Controlling labor costs is tricky in today's environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, monitoring these costs and preventing overspending is critical.
A logical first step in managing labor costs is to know how much you're spending. And the answer isn't as simple as looking at the total gross wages you pay monthly or yearly. You need to know the actual and total amount of these costs. Fortunately, there's a metric for that. The labor burden rate reflects companies' additional costs beyond gross wages. These generally include expenses such as payroll taxes, workers' compensation insurance, and fringe benefits. Knowing your labor burden rate can enable you to truly "right-size" your workforce.
Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you'll incur costs when outsourcing, the time and labor costs it saves you could result in a net gain. Carefully chosen and implemented technology upgrades can provide similar results.
Marketing and Sales
Like labor, strong marketing and sales are critical to most businesses today. So, skimping on their related costs typically doesn't 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 it's sales metrics, labor burden rate, or supply chain management, objective, professional advice can help you and your leadership team obtain an accurate picture of your costs and target feasible solutions. Please consider our firm for assistance.
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TMA Accounting
