Raise Your Head Above the Overheads You Are Drowning In

So, you have planned your venture for years, written out the perfect plan and finally put things into motion. Everything is going fine, and you thought you had all costs covered, but some overheads just keep on increasing. After all, who could have anticipated that sudden increase in service taxes or the hike in fuel price that came out of nowhere? While these variable costs may seem small in the beginning, they can add up to be a huge burden non your finances. It is very important for the health of your business to identify which overhead costs are shooting up, and if they are within control, try and manage them initially. Let us see how it can be done.

Take a realistic view of the situation: What are the economic factors you are operating in right now? Is it feasible to cut costs? Is it going to hamper long-run growth and sustenance? These are the questions you need to answer to yourself honestly. For example, if you have downsized your workforce during the recession, there is a possibility the smaller workforce will hamper your relationship with clients in the future. You should not jump into drastic cost-cutting measures without evaluating the possible repercussions.

How to understand how much cost is the right amount?

To identify an optimum cost structure, you could use other companies in your industry as the benchmark. There are various other benchmarks you could set for your costs. It is important to pick the right method for benchmarking, as this will help you identify potential threats of excess costs, as well as potential opportunities in areas where you can cut costs.

How is benchmarking done?

There are multiple methods of benchmarking costs. Some of the simplest methods are:

Internal benchmarking: You can use past data for internal benchmarking. Calculate costs in the past years as a percentage of the sales, then use those percentages as benchmark for current costs. Alternatively, if your company has multiple branches, you can collect sales and cost data from each branch and use the percentage numbers to rank them as per efficiency.

Peer benchmarking: If you can manage to get access to your competitors’ cost structures, using that as a benchmark is a great option to determine where your company stands.

Industry benchmarking: Collect cost data of the whole industry and calculate its percentage against the total sales. Use these numbers to estimate whether your cost versus sales number is at par with the industry standards.

Once you have a clear idea of your cost goals in terms of numbers, it will be easy for you to reach them. Benchmarking all costs will give you a fair idea of what client-staff relationships are of value to this structure, so you can review them closely. In case any points are identified during the review process that can be improved upon, you can conduct interviews with the stakeholders to identify potential solutions. These will provide you with valuable information to help you draw out a plan you can use to cut costs effectively.

We hope the idea of using benchmarking for cost-cutting helped you get deeper insights into the cost structure of your business, and helped you stay ahead of the curve in the long run!