You have been tasked to cut costs by 10% – Now what?
I was recently part of a lengthy discussion with other finance professionals concerning what to do when your CEO tells you, (the CFO), that you need to cut costs by 10% across the company this year.
There are plenty of ideas & approaches, some very narrow minded, single focused. Others say 10% is easy… do this & do that…. In my opinion, there is something very wrong with anyone who can say cutting costs by 10% is easy. In this discussion, I guess it is always greener on my side of the fence versus the company that needs ‘fixing’. To be fair, after having working in Fortune 100 companies for a majority of my career, there are always saving opportunities!
As a CFO, I’m tasked with maximizing cash flow, & driving the bottom-line without inhibiting Revenue or Sales. Yeah I have to make sure everything is in compliance too… Over & above these roles, this CFO is the confidante of the CEO/President often responsible for delivering the message while retaining a cohesive team, across all departments/divisions that are focused & driven toward a common set of goals.
This might sound harsh, but anyone who claims they can ‘Easily’ find 10% savings, or cost optimization & process improvements or “Cost cuts”, then I say you weren’t doing your job in the 1st place. This should not be a fire drill. It is every bit a part of your job as the annual budget process or forecasting is. In my role as a part time CFO supporting multiple companies, there are always saving & improvement opportunities to be quickly found. Whether or not the CEO or BOD is ready to make these changes is a different discussion. My goal is not to work myself out of a job but maintain maximum benefit & efficiency as a method to meet other bottom line goals & metrics for client CEOs. Give me your blessing & I’ll make it happen, but not only when asked… but always prepared with options at hand for Executive Management.
The CFO is the conductor! The right hand of the CEO. The CFO needs to get out from behind his/her desk & work across all the vertical departments getting buy in & support to drive a common vision & operating mission of continual process improvement, internal & outsourced, direct & indirect costs. The CFO & COO / Divisional Managers better be on the same page.
As CFO, I want access to the suppliers / vendors & customers. CFO’s need to stop acting like Controllers sitting in the caboose of the train… Get out of the caboose. The view from the back end of the train is where you have been the past. Step forward! Walk the train checking every boxcar, filled with your employees in different depts, peers, vendors, suppliers & customers. Everyone better be headed in the same direction. That means communication & knocking down internal walls. If these folks aren’t headed to your company’s desired destination, get’em off the train! The CFO (conductor) also works with the CEO /Sales/Engine room focused on the future. That equates to a lean & mean operation…. A 10% cost cut, better mean sacrifice across the company. If it is easy, get a New CFO, that’s your 1st savings.
Step 1 – Always make sure your own Finance departments are as lean & mean & efficient as possible. It is too easy to point fingers which merely create walls & division if your backyard is a mess. Lead by example.
Step 2 – Identify double the cost savings & solicit others across the vertical departments in your company (Sales, Marketing, Operations, Manu, Distrib, IT, etc…). You may have big shoulders but this is a burden that must be shared by all. The decision is not yours alone. Once all identified, your CEO must bless. (You should be way ahead of the game here, but asking for other ideas helps build & solidify bridges!)
Step 3 – Go to the Balance Sheet! How much are poor practices hurting you? Bad Debt & Warranty Reserve, Inventory levels. There can be no argument for improving these numbers. Far too many folks are obsessed with the Income Statement.
Step 4 – Direct costs – Payroll is usually the biggest cost you have. Are you operating a Union or Nonunion shop? What does the OT rate look like? Can you freeze salaries? Do you have a list of the bottom 10% employees (under-performers)? A painful but needed exercise that should be done regularly. Vendor costs – they are your partners. They need to feel your pain too. Ask for rebates, versus timely pay discounts. I don’t like paying early. I like cash too much! How set are you with your ‘favored vendors’. Who are your best customers? The ones that you make the most profit & who pay you on time! Don’t you think the same is true from your vendor’s perspective?! They must belly up! Everyone has sacred cows, your favorite supplier, an untouchable customer, an employee that rules the roost. Get it on the table. Sometimes your most valuable player can also be your biggest impediment to growth & savings!
Step 5a – Internal SG&A. This is often the 1st place misguided folks look to cut costs. I am totally in favor of self- funding incentive & bonus plans, but cutting cost or ticking off the sales engine is not the right way to go. You should definitely curb expense report T&E expenses, but these are usually small potatoes & won’t get you to where you need to go. Advertising, marketing, lunch& learns, golf outings, sponsorships all should be carefully reviewed & budgeted in advance. These folks need to feel some of the pain for the team, but keep the Sales & Revenue cooking! I have definite firm beliefs in terms of self funding, pay when paid incentive plans & maximum amounts as % of profit but that is a different topic of discussion. You don’t pay on Sales. You pay on the profits generated from the Sales.
Step 5b – Your ‘other’ Overhead costs need to be honed regularly. Fleet costs, H&W costs, renegotiated leases & service agreements, insurance premiums, energy & telecom costs should be optimized at least on an annual basis. There are loads of consultants that will gladly do this work for you & share the savings. You need to consider outsourcing… your IT, Payroll, maybe even your CFO! (Shameless plug! – check out http://www.procfo4u.com)
Step 6 – Most people think of ‘Saving’ & that means Cost Cutting … consider attacking your sales pricing & increasing your prices without increasing your costs. This will accomplish the same goal! Come on CFO’s think out of the box.
All these steps are needed, because you will never save or cut costs to the bottom line at least not for the long term benefit.
Even though I prioritized the steps above, As CFO (I prefer CRO – Chief Results Officer), I am multi-tasking, staying involved with all these at the same time. Finally, a great CFO/CRO better have these on the radar at all times. This is not a fire drill. It’s a call to action that you are ready & prepared to implement, & it’s a team effort!