Although cutting costs in the accounting department is far from anyone's favorite thing to talk about, it is definitely part of any CFOs job. But how you cut costs and being smart about it is what we dived into in our latest episode of CFO. We chatted with Ken Wentworth, Speaker, Author, and Fractional CFO at Mr. Biz Solutions to find out how he has done this very thing as a fractional CFO at companies across the country (and for decades). Let's start with what not to do.
Common Mistakes in Cost-cutting
One of the greatest mistakes many decision-makers tend toward is to employ blanket cost-cutting across the entire business as their major strategy. The reason it’s a mistake is that it ignores context. Your business has different components, and imposing a blanket cost reduction, while sounding like the sensible thing to do, could actually create more harm.
Manufacturing companies often cut the budget for sales before considering cutting the manufacturing budget. This directly hurts the pipeline but keeps operational costs high. Wentworth suggests the opposite approach. Keep your salespeople selling, while cutting in the manufacturing area.
Where Should CFOs Look to Cut Costs?
First, consider the context. A drop in revenue is what’s likely creating the need to cut costs. This means that you need your pipeline to stay healthy.
It’s also why the blanket approach can do more harm than good - if you go that route, you could be making changes that hurt your pipeline. It’s the easiest way into a downward spiral. Revenue will keep dropping, and you’ll keep hurting that pipeline if you don’t change your approach.
The recommended course of action is to pull the P&L sheet, run through every expense, and actually grade them. What you’re looking for are expenses that contribute to the health of your sales and revenue, as well as to that of your customer service efforts. Those need to receive resources to bring revenue into your business.
“Turn problems into profits," Wentworth said.
How to Grade Expenses for Cutting Costs in Your Accounting Department
When reviewing your expenses, grade each one. The scale Ken uses indicates each expense line’s impact on sales and customer service:
0 - Zero impact
1 - Minor impact
2 - Moderate impact
3 - Direct impact
Most of the time, this process will lead to a review of labor expenses. It does depend on the industry you’re in, but he describes it in a logical way, by looking at the value chain within the typical business:
Revenue is down which triggers the cost-cutting effort
Less revenue means production volume is down
Lower production volume means less need for cost-of-goods labor
In this scenario, your gross profit margin will be your indicator. If you don’t make adjustments to your cost-of-goods labor, your gross profit margin will drop during your period of low revenue.
Also related to labor expenses are benefit expenses. Get quotes for healthcare plan alternatives once every year, to bring down the cost to the company and cost to employees, depending on what portion of the contribution is being deducted from their salaries.
Avoid the Pitfall of Carrying Unnecessary Expenses From Year to Year
For small- to mid-size businesses, there are two ways to avoid such pitfalls of unnecessary spending: cash flow planning and budgeting. Ken raises the point that there is an unbelievable number of smaller businesses that don’t have or use a budget. This is almost begging for trouble from a financial perspective. In addition to these areas, you can review pricing.
Budgeting and cash flow: Avoid getting trapped by historical data, by focusing on your margins, more specifically your gross and net profit margins.
Pricing: Identify and adjust products or services that are breaking even - they’re almost a liability to the business and in some cases literally are liabilities, losing the business money.
“Create something that you can replicate easily,” Wentworth said.
What Tools Can You Use to Process Cost-cutting in the Accounting Department?
Even traditional tools such as Excel and Quickbooks are a great place to start when looking at cutting costs. Whether you're using a cloud-based ERP or a good-old-fashioned spreadsheet, roll up your sleeves and get crunching. Pull out data regularly, at whatever your reporting periods are. Just be sure to mind your margins.
KPIs can also be useful in this context, but be mindful not to track too many of them because then none of them really get enough attention. Ken’s top two pieces of advice are to have a budget and mind your margins. Why? Because these two things relate to every other aspect of your business.