Reduce Operating Costs: Five Tips That Can Boost Your Profit Margin

The 5 operating costs that MAXIS^® can help to trim

It’s a near certainty that businesses of any size or scope would seek to reduce costs, if given the chance. And why not? Lowering operating costs is arguably the most direct way to increase profitability.

If only it were that simple.

In reality, many businesses find that reducing costs is actually quite complex, given a host of variables unique to their business. Add to that competing internal priorities, as well as a general fear of cutting too deeply and trimming muscle and bone with the fat. It’s no wonder, then, that businesses find controlling core costs one of their biggest challenges.

While it can be complicated and time consuming, the benefits of addressing costs are clear. Impacting costs directly relates to improving profitability. For many reasons, reductions in costs do not always translate dollar for dollar into profitability, and by cutting too deeply, you can inflict damage on the organization. But by cutting smartly, you can improve profitability.

MAXIS^® by Freed Maxick was created to support an organization’s desire to run “lean and mean” in order to increase productivity and profitability. With MAXIS, management has a better understanding of both the financial and the operational aspects of the business and is able to take firmer control of making more confident decisions.

Let’s first understand costs and then how MAXIS is positioned to assist your organization.

Controlling Operating Costs for a Business

So the easy question is, where do you start? In almost every organization, there are “Five Buckets of Costs.” While the order of these buckets vary somewhat from organization to organization and industry to industry, the general order from biggest impact to smallest is:

1. Staffing-related costs: salaries, employee benefit plans/health insurance, HR services (payroll, search, training and development), workers’ compensation, unemployment benefits, etc.

2. Materials and supplies: direct materials (i.e., those related to production of products and services) and in-direct materials such as office supplies and consumables

3. Property Plant & Equipment (PP&E): land, manufacturing plants, office buildings, manufacturing equipment, etc.

4. Contracts and contract services: outside services such as outsourcing, contractors, service providers, etc.

5. Taxes and insurance: federal, state, local taxes and property and casualty, professional, directors and officers, and many others

Ultimately cost reduction serves to increase the gap between a business’ revenues and expenses. This, in turn, expands profit margin—even if revenue were to remain constant. As a result, the question arises what to do with increased free cash flow after the cost savings takes place. It can be returned to the owner/shareholder, or it can be used to reinvest in the business and fuel next-stage growth. New investments can include development of new products and services, acquisition of new customers, or marketing-related investments to build brand awareness and equity. They can also focus on larger goals such as strategic acquisitions. The key is to unlock the cash necessary to move forward.

That’s where these five buckets come in.

Bucket List: Operating Costs Examples

Leadership should seize the opportunity to examine each bucket with a critical eye. How are costs managed? Are they necessary? If so, can they be reduced or streamlined – through negotiation or otherwise – in ways that don’t adversely affect operations or organizational capacity?

Yet leadership in most organizations is spread thin with other obligations and some of them, by their own admission, aren’t savvy enough to fully understand the implications of how decisions affect certain areas of the business.

Let’s consider some operating cost examples, bucket by bucket, and how MAXIS is positioned to help leaders confidently identify and implement cost-cutting measures.

1. Reduce staffing-related operating costs

• Move to a flexible/variable workforce (e.g., shift less critical/lower demand staff to a contractor status). The objective is to allow for slight increases in hourly rates, while reducing overall costs.
• Outsource support functions, such as training, IT support, accounting back-office.
• Renegotiate benefit plans and/or use a managed care organization for workers’ compensation
  

MAXIS: Pre-pandemic, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) had already reported that the country will experience a decline of almost 4% in bookkeepers and accounting clerks by 2028. As staff phase out, the majority of bookkeeping and internal accounting transactional tasks will be automated. MAXIS is an outsourced accounting service that automates your back office bookkeeping and accounting, tailoring data to deliver more accurate, detailed financial information with which to drive timely business decisions. The implication of adapting technology infers the elimination of people when, in fact, it automates menial, repetitive, and transactional tasks enabling financial professionals to delve deeper into data, analyzing, benchmarking, and scaling to give better direction for long-term productivity and profitability. Certainly, a more effective use of their time.

2. Reduce materials and supplies operating costs:

• Source and renegotiate materials and supplies. It is much easier to re-negotiate indirect, rather than direct materials, but savings can be found from either avenue. If you haven’t sourced materials recently, many organizations have found savings in the five to 15 percent range.
• Purchasing cooperatives serve a unique function to pool the purchasing power of multiple organizations to increase buying power and therefore reduce purchase costs.
• Acquisitions present an opportunity to discover whose purchasing contracts are better positioned. After an acquisition, examine all contracts to find the lowest price on all common materials and then drive all volume to the lowest-cost contract. If the volume change is significant, there is also an opportunity to renegotiate price based on volume.
• Complexity reduction is a critical component of any organization. Identify duplicate parts or materials and identify opportunities to standardize on fewer parts. Then renegotiate volume based on fewer parts with greater volume.

MAXIS: With the investment in a customized framework, data can be derived from automated systems that help to create better processes, improve efficiencies, and strengthen the bottom line. Analytics provide strategic insights to tailor solutions that confirm strategy, highlight successes and identify weaknesses, and affirm opportunities for the best efficiency and profitability. This includes monitoring costs of materials and supplies, survey supply chain, and observe the individual cost line item analysis and monitoring. MAXIS helps businesses monitor cost lines through customized report delivery. Benchmarks alert management to changes that have a significant impact, both positive and negative, to the bottom line.

3. Reduce Property Plant & Equipment (PP&E) Operating Costs:

• If you’re a professional services organization or health care provider, what’s the value of owning an office building? While you can take the depreciation, you also bear the annual maintenance costs, and you lose the right to invest that capital in a higher return area. Can you sell the building, free up the capital and convert it to an on-going expense? It’s all about return on assets.
• If you’re a manufacturer, how often are you using that piece of equipment? Manufacturers and contractors often have a strong bias to own a piece of equipment, even if it is lightly used. Selling off that lightly used piece of equipment and then renting the same equipment when needed may be a better option. While the rental costs may be slight higher than that of a proportional usage on owned equipment, the annual cost of that equipment should be lower.
• Sale and leaseback is another option to free up capital. While it will actually increase expenses, it will pour capital back into the organization. If you are over-leveraged and need to reset capitalization the business, look to sell off under-utilized assets and then either lease them back or rent comparable equipment only when necessary.
  
  

MAXIS: MAXIS assists with return on investment analyses and decision support for capital investment decisions. We work within many industries to implement specific systems for the purpose of monitoring opportunities and improbabilities. Assessing costs and weighing options is universal to every organization regardless of the geography or industry in which it operates. Whether food and beverage, manufacturing, or health care, timely and relevant data and analytics can bridge the gap between making confident decisions to shape successful outcomes. Insufficient information can lead to inflexibility, underutilization, and lack of integration. With tailored systems that include standardizing data and creating areas of automation, companies can realize more successful controls that provides more accurate reporting to realize higher revenue.

4. Reduce contracts and contract services costs:

• Much like re-negotiating material costs, the same strategy can be applied to contracts and contracted services. If you haven’t re-sourced your contracts in two to three years, it is time to go back to the negotiating table and identify opportunities to drive down costs.
• As with materials and supplies, purchasing cooperatives can also be used to source lower-cost contacted services.
• Examine opportunities to give contracted services to under-utilized staff—or even consider cutting them altogether.
  
  

MAXIS: A historical analysis of costs incurred over time, along with market comparisons, trends, and benchmarks, provide a clear picture of the value of the relationship. And with the impact of business disruptions and the damage these interruptions cause, the need for better tools and solid processes can help to ensure business continuity as best as possible. MAXIS doesn’t wait for disturbances to occur before we evaluate the costs associated with contracted relationships. We thoroughly consider the need for leverage and the potential of soliciting bids or renegotiating contracts if the financial outcomes aren’t in your favor.

5. Taxes and insurance:

• While negotiating on taxes may not be feasible, engaging a trusted advisor to conduct a thorough tax planning strategy is. There are many opportunities to reduce taxes based on proper planning and by taking advantage of appropriate tax credits.
• Sourcing your insurance coverages should be done every three to five years as your needs and coverage options may change.
  
  

MAXIS: The implementation of a tailored cloud-based system creates easier and safer accessibility for every member of the organization’s internal team, as well as with your Freed Maxick tax service professionals. Having all of your organization’s experts on one team provides experienced and knowledgeable professionals “at the ready” as tax laws change. Not only do we introduce clients to the most appropriate technology for their specific needs, we design reports that are most beneficial to assessing their current business standing at any point in time and implement scenarios that might negatively, or positively, affect its financial health by identify potential pitfalls and highlighting ways to take advantage of opportunities to maximize savings while seeking ethical and legal ways to minimize taxes.

Word to the Wise About Reducing Operating Costs

We find that far too many businesses view cost cutting as a one-time initiative. On the contrary, when done correctly, cost-cutting should be a sustainable initiative that creates a recurring savings opportunity. It is also critical then to understand the opportunities of how the savings will be realized or invested in the business.

As for the notion that this is a one-pop challenge, the real goal here should be to create a sustainable process of cost savings enterprise-wide. Things all around your business – inside and outside – change constantly, and that impacts how your business must spend money to make money every day. It’s contingent on your company’s leadership team to identify those changes, understand how they impact business operations, and do what’s necessary to leverage them in ways that fuel growth.

These are but a few examples of reducing operating costs of the many items that our MAXIS team helps our clients evaluate in meeting their business transformation challenges and the considerations that are taken into account. Informed decisions are the ones that inevitably lead the organization to trim costs and increase profitability.

Do you have questions about controlling business costs or other business issues? Please contact Alexis Becker at alexis.becker@freedmaxick.com for a complimentary discussion about how MAXIS can help.