Re-Calibrate Your Costs: Surfing a New Wave

There will be two waves of business closures once the current measures are relaxed. The first will be businesses with unsustainable cost bases which struggled before lockdown and will not re-open or last very long afterwards.  

The second wave of closures will be sound businesses which aren’t able to navigate the cash flow requirements of the “new normal”. Their cost base – amount & structure – won’t have changed sufficiently from before lockdown to account for the fact that revenue will pick up only gradually and cashflow even more slowly (think debtors paying up to 120 days with government grants and loans running down.) These businesses will form the second wave to crash.  

To survive businesses need to take a step back, reassess their costs base & supply chain from a zero-base and make some bold descisions now. Many businesses find it difficult to change.  Any company that intends to survive the second wave has to totally re-set the structure and the quantum of its cost base today and surf a “New Wave”

Zero-Base Perspective

As we’ve written in our recent series on how to deliver a Cost Reduction Programme costs increase over years of trading and cost reduction initiatives are rarely sustainable or make a noticeable impact on the bottom line unless done professionally. Further, although 100% of new cost savings go to the bottom line, compared to only 5-10% of new sales, cost reduction initiatives are usually underinvested. We discussed and I won’t repeat the reasons.

However, it is interesting to read various surveys and papers being written now to help organisations navigate their way through these current, troubled waters. They unanimously ignore third party costs (direct & indirect) as a source of opportunity although these are the quickest, most tangible, most accessible and often richest source of impact on profitability/bottom line.

The cost base you were able to sustain before this shock is not the cost base you will need to survive once lockdown is eased.

Just Do It!

Assuming that major investments in infrastructure are either well costed for completion or cancelled. Attention should therefore be given to all third-party costs, that’s cost of sales and indirect costs.  The balance between fixed, semi-fixed and variable costs also needs to be assessed. Outsourcing and insourcing need to be re-considered. If certain operating units are not performing and require an overhaul or closure, then these should be added to the list of target cost reductions. 

Spend Category Savings Realised:

JMCL has worked in most sectors and has delivered highly successful transformative changes across clients cost bases. JMCL knows that with the right focus and application spend categories can be recalibrated without wrecking the value of your business. Over the next few weeks we’ll be sharing our expertise on differing spend categories.

JMCL is a consultancy practice specialising in helping organisations to fundamentally reduce and re-shape their cost base. Through its Enlightened Procurement approach JMCL will ensure that the new cost landscape not only delivers significant impact to the bottom line but also adds tangible and intangible value to the new operating environment.

For more information on the thinking behind this article and practical measures to impact your bottom line though cost transformation contact Jonny Michael:

j.michael@jmclconsulting.comM: 0044 7831390161