How can you manage and reduce business costs effectively? By developing a cost reduction framework to foster financial awareness, increase profitability and make more informed decisions in your business journey.

Listen in to dive deeper.

Implementing an Effective Cost Reduction Framework

Transform your mindset.

Firstly, shift your perspective to see cost reduction as a positive endeavour rather than a negative aspect of business operations.

Optimal Timing for Cost Reduction

Cost reduction programs should be an ongoing effort rather than a reactive response to challenges.

The Importance of Team Involvement

Emphasizing the importance of engaging your entire team in a collective and participative exercise is undoubtedly a key ingredient for success with a cost reduction framework.

Aligning Cost Reduction with Business Objectives

Ensure that your cost reduction framework aligns with your business goals and maintains the quality and value your customers expect.

Practical Steps for Cost Analysis

Understand the different cost types in your business. Particularly, identify value-added and non-value-added costs, and gain insights into your cost structure to make informed decisions.

Embracing a Continuous Cost Management Culture

Lastly, develop a culture of cost consciousness. Make cost evaluation an integral part of your business DNA, regardless of your business's size or current financial state.

In conclusion, by proactively managing and optimizing their costs, businesses can lay the foundation for sustainable growth in the long run. Moreover, by embracing a cost-conscious mindset and implementing an effective cost reduction framework, businesses can enhance their profitability, and propel themselves towards a prosperous future.

Tune in to the next episode as we take a look at specific cost-reduction strategies and provide you with a toolkit to effectively manage costs. We value your feedback and encourage you to share this episode with anyone you know who may benefit from this. Join the I hate numbers community for more resources and remember folks, Plan it, Do it, Profit.

All businesses should be thinking about costs more, particularly about managing those costs and reducing them where possible. In this week's, I Hate Numbers Podcast, I'm going to be presenting a cost reduction framework, which is going to address these important questions. Number one, what do we mean by cost reduction?

Number two, when should a cost reduction program be implemented? When's the best time? Next we're going to be looking at how to implement an effective cost reduction program to make sure it has success underpinning it. In next week's I Hate Numbers podcast, I'm going to dive deeper and explore specifics and look at the toolkit that we can have to actually reduce and manage the costs in our business.

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode on the I Hate Numbers podcast. My mission for over 28 plus years has been helping business owners increase their profitability and make more money, increase the level of financial awareness and literacy, reduce stress, reduce tension, reduce tax, and have the business that they aspire to have, what's not to love.

About that. Let's crack on with the podcast now. The first thing I want to address is the idea of what is meant by cost reduction. Now, my personal preference is to not think of cost as a negative thing. All businesses, whatever the size of that business, whether you're an acorn sized business, a mighty oak of a business, whether you are a private business, a not-for-profit business, a social enterprise, it matters not.

Costs are incurred or resources if you wanna be more prosaic to help you deliver those goods and services to your customers and to support you in what you do. I prefer the idea of challenging costs, and we're not talking about a jewel. We're not talking Pistols at Dawn. But instead of thinking of things in a negative context, think about the costs in your business and what you are doing as the business owner, part of a senior management team,

part of an operative is to challenge those costs that you have in your business. Which brings us on to the next question. When should we be implementing and challenging our costs? When should we be implementing a reduction program? Well, the short answer is, it’s a continuum. Managing costs, being conscious of what those costs are, challenging them, managing them, so, They are minimised to still deliver value to your customers should be an ongoing situation.

We want to create a culture where our team, where we as the business owners are aware of what those costs are. We're not adopting a slash and burn policy, a knee-jerk reaction whether our businesses are extremely profitable and growing, whether we're facing challenges, and we can see the bailiffs over the windscreen ledge approaching us, whatever the state and health of our business cost culture thinking about costs should be part of the fabric, part of the business.

DNA, as I said, I prefer the concept of challenging costs and asking that what if question, are they necessary? Remember costs? Challenging the cost that we have. Look at it as a positive process. Don't look at it as a negative. Now, having addressed those first two considerations about what we mean by cost reduction, when it should occur, the next key question is, how do we go about it?

What do we need to do to make sure that we achieve the outcomes we want in our cost reduction program? Without putting a question mark, without questioning and putting the survival of the business at risk. There's a few key ingredients that we need to throw into the mix here, and one of them, it's to make sure that all your team members, all the people in your organisation, all the people in your business, even if it's just you and somebody else working on a part-time, your freelancers, it should be a collective, a cooperative exercise.

It should be an exercise where everybody is involved. If you merely go ahead as the business owner and impose a blanket cost reduction across the board with any due consideration, you're going to find it demotivating. You're going to find it's going to have negative consequences, and you're going to find that your future prosperity

could be put into jeopardy. Have I cast my mind back to the last few years? For example, during the period of the pandemic, many businesses understandably cut back on expenditure on marketing, cut back on expenditure on R&D. It was a slash and burn policy - a knee jerk reaction for many business owners.

What happened is once that situations started to change, not having invested that marketing spend, not having invested in their business, put them on the back foot, and those businesses that had actually looked at the cost management, the cost challenges more judiciously, more objectively, more scientifically, are the ones that are doing better

and the ones that are prospering. As a result, what else do we need to consider? Any cost reduction program, any cost challenges that we do have got to be in line to make sure that we still achieve the objectives we set out to do. So whatever your business Northern Star is, whatever your key objectives are, make sure the cost challenges that you implement

are still such that you achieve your end goal, your end objectives. Make sure it's all carried out with due harmony. Now, if you have positioned yourself as a quality service provider, for example, then you need to make sure that cost or resources are deployed such that you maintain that quality threshold that the customer, your client requires and expects.

If you cut corners there, that will send out the wrong messages. That will make your offer diluted and you may potentially lose business. How many of us have been in that situation where we've spent money perhaps buying a quality product only for it to be put in a very cheap plastic bag? There's a disconnect in our minds between the quality of the product that we're buying and the bag that we've been provided with in which to carry that particular item.

Not a good look. Now, having embraced the idea of a team effort, participation being the watch word, having looks at this as a positive, continual process, having identified our key objectives at the beginning and what our strategy is to achieve that. We then need to do some more practical things as well.

We need to understand what those costs actually are. We need to consider the timeframe over which these costs are going to be managed and reduced. We need to understand what those costs are that exist in our business at the moment. So look at your systems, look at your accounting systems, and understand and have an idea

what your costs are by type, where your costs are allocated and used up against the different products and services or projects as it may be. And if you don't have that information to hand, if you're not able to extract that information, you are going to find it very difficult to understand and to know what to do going forward.

So that's an absolutely key element in this exercise that you've got to be able to extract and understand and be aware of what those costs are, not only by cost types, and you can deal with broad brush at this early stage. Look at what they are associated with the different products you provide, the different services.

Understand perhaps what they are in terms of behaviour fixed and variable. Check out the show notes by those folks for links to previous podcasts where we've explored the topics of cost before. Unfortunately, in my experience over the last 28 plus years here, far too many business owners for a number of reasons, are disconnected from understanding what the costs are in their business.

They are successful despite that lack of information, as opposed to because of it. Our next consideration is once we've understood and know what those costs are, we can then subdivide those into what I call value added and non-value added, or if you prefer a simpler explanation, good costs versus bad costs.

Now, value added costs, or good costs are those costs that we're incurring that helps us achieve our end objective. They are ones that enhance and support the customer experience. They're ones that make our life easier in terms of time efficiencies, time is money, all said and done. So those costs that are actually doing something that contributes positively to the customer experience,

so the business experience, the business process, the business efficiency are ones that are value added or why it would call good costs. Bad costs are the other extreme, are the opposite to that. These are ones that have no real intrinsic value. These are ones that don't support the business. These are ones that don't enhance the customer experience, and therefore those are the costs that we can look to get rid of.

Imagine if you are a product manufacturer. You are designing a product. There may be buttons on there, there may be features on that, which customers don't actually value, which customers don't actually require. Ones that have no functionality, they're a nice look on, but nobody actually uses them. Then removing those items, removing that will potentially reduce some costs.

So again, think about your cost in terms of good and bad or value added and non-value added. Choose whatever sits more comfortably in your framework and be very careful, folks. Please don't use the IDM concept of overheads. Overheads, in my opinion are negative terms. It implies the costs are unnecessary.

Well, let's have a look at something like an office building where you might be working. You've decided that you want to work away from your house. You've decided that you need a premise for other staff members to congregate hold meetings. Well, rent in itself is not a negative thing. It supports the provision of services to your staff, your internal service, and it's necessary.

When we think of salary cost, when we think of supervisory staff, when we think of salaries going on the professionals like IT, HR, don't forget the accountants as well. Well, they're providing a service to support the main team. In a hospital environment, doctors, nurses are certainly critical, but if we don't have the pathology, the X-ray department, the cleaners, the ancillary staff, and all the rest of it,

the hospital cannot function. So this requires contributions from everywhere, but again, still think of it in terms of value added and non-value added. And as a spoiler alert for next week, we are going to dive deeper to look at a toolkit and practical things we can use to help us reduce and challenge

those costs even further. Any final decisions that we make on reducing costs coming from our cost challenge have to be based fundamentally around our ambition, our vision for the future. We still want to achieve that end goal. So make sure we cut and reduce without having a detriment on that end objective.

So folks, I hope you found this podcast of use. If you have, I'd love it if you could share. Hey, feedback and comments are really great ways of actually powering the podcast and getting it in front of many other users, and I'd love that if you could do that. What are your thoughts? Do you have good and bad costs in your business?

Are you looking at a cost challenge, a cost reduction exercise? Let me know your thoughts and until next week folks, I'll see you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.