As the world is suffering from the rise of COVID-19, at the same time business are suffering due to lack of revenues, bad debts, fall in demand etc. and ultimately it is impacting profits and reserves of businesses. Many businesses are finding it hard to survive and filing for bankruptcy for ex- Gold’s gym. On the other hand there are also companies like Parle which have recorded highest sales in the past 8 decades during this pandemic. This pandemic have realised businesses two important things:-
- Review their costs structures and optimize it to survive in the long run
- Importance of business continuity plan (BCP)
As economic recovery will take some time, Companies all over the world are focusing on reducing their costs so as to cope up with the loss of revenue and a way to survive during this pandemic. There is a saying also “Cost saved is equal to the income earned”. However, while cost reduction organisation should devise strategy which aligns with vision and objectives of the company and leaves no ambiguity that can create hurdles in future growth of the company. Cost optimization should be such which creates competitive advantage for business and provide value to all stakeholders in the long run.
Cost optimization strategies differ from organization to organization and from industry to industry.
Here are a few methods described below which can help organisation in cost reduction:-
- Identify non-value-adding activities and eliminate them: Organizations should evaluate their end-to-end processes and identify activities that do not add value to the final product or not required during this period, eliminate them.
- Streamline Supply chain management: Organizations should review their Supply chains and transform them to make them more robust and efficient. For ex- Negotiate with vendors for more discounts or with transporters to reduce charges.
- Reduce cost of capital: Organizations should conceive ways for a cheaper source of capital. It will help an organization in long run and achieving the competitor’s advantage.
- Evaluate outsourcing of activities: In today’s time, nothing should be sacred. Organizations should evaluate outsourcing of some activities which can save cost by not compromising with quality.
- Automate processes: Organizations should leverage technology for certain repetitive processes and reduce labor costs.
- Reduce fixed costs: Reduction in fixed cost helps an organization to achieve the competitor’s advantage and organization which have lower fixed cost can easily survive in comparison with the one who have higher.
- Identifying opportunities for improving energy efficiency: Power cost is a major cost in manufacturing industries and in some service industries also. Organization should ascertain ways for improving power efficiency and reducing power cost.
- Realization of non-moving inventory at discount: Non-moving inventory should be sold by an organization either at less profit or no profit, to save warehouse cost and the opportunity cost of capital.
Cost optimization is the best way forward for an organization to survive during tough times and the best way to achieve is by increasing efficiency and effectiveness of processes and people of an organization, so that it results in faster growth and competitive advantage and provides maximum value to stakeholders.
PDF version is attached, please refer the link: Cost Optimization During Covid-19
The information contained herein is in summary form of Guidance Issued by Auditing and Assurance Standards Board of ICAI and is based on information available in public domain. While the information is believed to be accurate to the best of our knowledge, we do not make any representations or warranties, express or implied, as to the accuracy or completeness of this information. Reader should conduct and rely upon their own examination and analysis and are advised to seek their own professional advice. This note is not an offer, invitation, advice or solicitation of any kind. We accept no responsibility for any errors it may contain, whether caused by negligence or otherwise or for any loss, howsoever caused or sustained, by the person who relies upon it.