We’re currently experiencing a veritable shopping list of these headwinds – inflation, interest rates, labour costs, fuel prices, and supply chain challenges – applying pressure on businesses across all industries.
For many CFOs, this may be the first time they’ve been tasked with leading their business through the type of challenges that, when occurring in tandem, can threaten not only profitability but business survival.
While CFOs can’t control the entirety of the company’s cost structure – or the issues that impact them – they can have greater control of the situation than they might think. Taking a proactive approach to cost management and removing activities that are a drag on earnings can have a significant impact on returns and contribute to value-creating growth.
The need to balance cost control with sustainable growth is a fine needle to thread, and not all businesses and costs are created equal. With so many cost control levers to pull, where do you begin?
Negotiate terms with suppliers
One of the most effective ways to limit external cost increases is to negotiate (or renegotiate) terms with your suppliers. This may involve discussing payment terms, delivery schedules, minimum order quantities, and other factors that can affect pricing. This is where the time you take to build strong relationships with your suppliers can pay dividends, by securing better pricing and terms to help control costs over the long term.
Update pricing strategy
Pricing is a critical cost control issue for many businesses. Updating your price strategy can help you stay competitive and protect your margins. This may involve re-evaluating your cost structure, analysing market trends, or taking the opportunity to test different pricing models.
Mitigate inflation risks
With all indications being that inflation will continue to rise over the next year, it has the potential to significantly impact your business' cost structure. It’s important to identify all areas of the business that inflation stands to impact, and the risk this will present for the business. Then, draw up a plan to mitigate them.
This might involve adjusting your pricing strategy, renegotiating contracts, or finding ways to reduce operational costs. It's also a good idea to continue to monitor inflation trends and adjust your plans as needed to avoid potential disruptions.
Review current processes
Regularly reviewing your business processes can help you identify areas where you may be overspending or wasting resources. By exploring the need for, and ROI of, certain expenditure you may be able to find ways to cut costs and improve operational efficiency.
Review capital structure
The risk to a business from the wrong capital structure can be greater than the potential benefits from tax and financial leverage.
Instead of relying on capital structure to create value on its own, CFOs should try to make it work hand in hand with their business strategy, including – or especially – in these current uncertain times.
Depending on your strategy and current financial position, your optimal capital structure and the path you take to reach the same goal may vary markedly from your competitors.
Invest in innovation and automation
When businesses are pressured to reduce costs, growth investments are often the first to get the chop. But it’s short terms savings that could set you back several years in the innovation game.
CFOs can help to deconstruct complex business cases into their most uncertain components and look at alternative funding structures that can help management to address the areas of greatest concern or uncertainty.
Labour shortages can also be a significant cost control issue for companies. Investing in technology and automation can help you find efficiencies. This may involve automating processes, implementing new systems, or outsourcing certain tasks to third-party providers.
Adopt greener practices
ESG (Environmental, Social and Governance) and sustainability issues are becoming increasingly important for companies of all sizes. While many businesses can focus on the reputational boost that ESG activities can bring, adopting greener practices could also help you reduce costs and improve your bottom line.
In managing costs within your business, mapping the supply chain is crucial, as is supplier resilience, given the number of companies that are or will experience significant financial challenges in the coming year. Similarly, lack of ethical behaviour in payment practices may be a risk you need to mitigate.
Your own investment in greener practices – such as your energy efficiency or types of business vehicles – can contribute to reducing overall costs.
Establish a cost control culture
Your finance systems can sometimes make the strategic value of the data a mystery to non-finance folk. Systems that provide non-financial stakeholders with real-time access to data and allow them to see the real cost without needing to understand complex accounting concepts can have real benefit.
Being able to access and understand the value of this data can enable and empower non-financial stakeholders to own their budgets and decisions, helping to bridge the gap between finance and non-finance professionals, creating an environment where cost control not only becomes embedded in the organisation, but a shared strategic priority.
Final thoughts
Often, the CFOs who achieve sustainable long-term growth view times of economic uncertainty and critical business issues a little differently from their peers. They tend to view adversity as an opportunity, rather than a time to ‘circle the wagons’.
Managing cost control issues as a CFO requires a proactive approach and a willingness to explore new strategies and technologies. By staying vigilant and taking action to limit external cost increases, you can help ensure your company's financial health.
