How CFOs Can Build More Flexible Cost Structures ~ Latest from Oracle NetSuite
CFO Leadership Council is proud to align with Oracle NetSuite as a national partner. Ian McCue, Content Manager, NetSuite,outlines several steps CFOs can take to avoid feeling trapped when a future situation mandates cost-cutting. .
When everything is running smoothly and costs and revenue follow a predictable pattern, CFOs have little impetus to think deeply about their cost structures given their other competing priorities. In those times, having a high-level understanding of monthly fixed and variable costs is sufficient.
But the limitations of this approach surfaced quickly when many companies felt the sudden and substantial business impact of the coronavirus starting more than a year ago. The immediate decline in business and a lack of clarity about the future led financial leaders to look for ways to cut costs — only for many to realize they lacked levers to pull to accomplish this. CFOs learned their companies’ rigid cost structures limited their ability to reduce expenses without turning to undesirable, last-resort options like layoffs.
In light of that, many businesses are now searching for ways to add flexibility to their cost structures. We’ve outlined several steps CFOs can take to avoid feeling trapped when a future situation mandates rapid (and perhaps temporary) cost-cutting.
What’s Driving My Costs?
Developing a more flexible cost structure starts with gaining a better understanding of the exact source and size of different expenses. This may seem obvious, but the reality is that many lack a detailed view of the various fixed and variable costs associated with specific processes, projects and products.
That information empowers CFOs to make decisions on where they can and should lower or eliminate costs when conditions demand it. With the right data easily accessible, they can make these calls with a higher level of confidence and easily justify the moves to other executives.
Finance software that supports multi-dimensional accounting can provide businesses with the data they need. Such a system can break down and compare the profit margins on various products, for example, accounting for not just the cost of goods sold, but dollars spent on sales and marketing and typical discounts. Decision-makers must know not only the daily costs of operating a manufacturing plant, but the expense of running a certain machine or assembling a specific item.
6 Ways to Add Flexibility
Once you have a better grasp of where your expenses originate, here are six specific ways to build more optionality into your cost structure:
- Review the product/service mix: Detailed data will make it clear where you should focus your time and money while in belt-tightening mode. What are the products or services that have the highest margins and lower variable costs? Will certain offerings hold greater appeal to customers? During a downturn, it’s all about maximizing margins and controlling variable costs. That shift could mean temporarily halting production or availability of certain goods or services and promoting others more than usual.
- Prioritize scenario planning: When business as usual breaks down, scenario planning shows its true value. Mapping out best-case and worst-case scenarios regularly allows organizations to plan out the steps they will take whenever the standard approach no longer makes sense. Trying to figure all of this out in the midst of a challenging situation is a mistake, because leaders are already under tremendous pressure and more likely to make rash decisions. A planning and budgeting tool can make scenario planning much faster and easier so that it’s realistic for businesses to do this quarterly or biannually.
- Lease more assets: Leasing all kinds of assets, from trucks to warehouse space to machinery, has become far more popular, and for good reason. Leasing allows companies to avoid a capital expense and more of an ability to stop paying for a resource when it’s no longer needed. Companies should complete a comprehensive review of all their assets to determine whether it makes more sense to buy or lease each one. It’s important to note that leases vary in length, and certain ones, like those for real estate, are usually harder to terminate than those for equipment, for example, but this is another way for businesses to avoid excessive fixed costs. Try to negotiate leases that give you the ability to scale up or down based on need.
- Build a contingent workforce: Workers who are not on the company’s payroll offer much greater flexibility than full-time employees. Companies may add contingent labor to supplement core expertise in a number of different departments so they have access to additional resources as necessary. Maybe the accounting team could use a hand preparing tax documents or customer support needs help during a particularly busy time of year. While replacing all full-time employees with contractors is not a smart or sustainable strategy, contingent workers give an organization the ability to simply not use them and keep headcount costs down when it needs to reduce expenses. Businesses should make sure they understand local labor laws wherever these contractors are located and also realize there will be initial training costs.
- Establish alternative suppliers: The pandemic highlighted the supreme importance of having multiple suppliers for key components and products. Redundant suppliers can not only boost supply chain resilience, but also provide greater cost flexibility in some cases. For example, establishing a relationship with a cheaper provider of a certain material that provides a lower level of service may be an acceptable tradeoff when saving money is of the utmost importance. Using multiple partners can also help organizations negotiate better prices and agreements that give you more control.
- Adopt cloud systems: Much like leasing assets adds pliability to cost structures, cloud software enables companies to pay for only what they use through a subscription that includes all upgrades and maintenance. With cloud systems, businesses can add or remove functionality as their requirements and situations change. That’s in contrast to on-premises systems that bring large upfront licensing and implementation fees. When evaluating these solutions, be sure to look for vendors that offer flexibility in contract length and provide post-sales account management.
Supporting the Evolving Role
As CFOs look to revamp their cost structures, it’s important to note that some fixed costs should be left untouched. Employee pay and benefits and any expenses related to workplace safety or compliance should generally not be up for debate unless change in business condition becomes permanent.
It’s not hard to see why so many businesses have immovable cost structures — finance leaders are trained to make their expenses as controlled and predictable as possible to minimize risk. But when unexpected events disrupt those plans, the cracks in that approach show.
As CFOs are recast from head of the finance department to strategic leader shaping the organization’s future direction, they must continuously work to strike a balance between keeping costs manageable and driving growth. A more flexible cost structure can help them take on these dueling goals.
For more than 20 years, Oracle NetSuite has helped organizations grow, scale and adapt to change. NetSuite provides a suite of cloud-based applications, which includes financials / Enterprise Resource Planning (ERP), inventory management, HR, professional services automation and omnichannel commerce, used by more than 24,000 customers in 203 countries and dependent territories.
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