Pratish Sharma, an Associate Tutor at London School of Business and Finance.
Economic forecasts are “cautiously optimistic” as we approach the next two quarters of the financial year.
Optimistic because the 2022 Economic Forecast projects that the EU economy will grow 2.7% in 2022 and 1.5% in 2023. Cautious because global output contracted in the second quarter of this year, owing to downturns in China and Russia, while several shocks have hit an economy already weakened by the pandemic: higher-than-expected inflation, especially in the US and major European economies.
Crucially, businesses looking for sustainable growth should strive to be as granular and methodical in their budgeting as possible. Traditionally, the different cost components direct costs, cost of goods sold (COGS), salaries and wages (S&W) and indirect costs, are lumped together in the budget.
While this gives finance the flexibility to manage budgets, it hampers visibility into actual costs across components, making it difficult to monitor and take timely actions when there are instances of non-compliance or inefficiency. Therefore, it’s advisable to budget for each cost component separately.
Approaching costs strategically includes:
- Recalibrate costs: The key objective of strategic cost management is to improve competitiveness through cost base optimization;
- Create a funding avenue to fuel growth: To fuel revenue growth over the coming months, investments will be required in areas like manufacturing automation, process improvement, IT and logistics upgrade;
- Bring agility into cost management: A strategic cost management framework will help companies become more agile in managing costs in tune with fast-changing market conditions.
An example includes a global manufacturing firm that cut costs by 18% despite a 12.7% fall in revenue through strategic cost management and helped sustain and improve EBITDA by 30bps in the challenging fiscal year 20/21.
For strategic cost management to be effective, collaboration across functions, especially among budget owners, finance and procurement is vital. The challenge most businesses face is that these functions operate in silos.
Furthermore, team members are now working remotely, leading to challenges in cross-functional collaboration, so it can be complex to initiate and execute a strategic cost management program. There is a pressing need for a cloud-based, unified software solution that provides spend visibility, variance reports, and cost analytics on user-friendly dashboards easily accessible and reviewed by business, finance, and procurement teams.
Forging ahead with cautious optimism
Businesses can look forward to revenue growth after unprecedented disruptions and challenges. However, the need for caution remains. Businesses can retain their competitive advantage in this unpredictable climate provided they can avoid financial stress.
An effective strategic cost management program is a powerful defense against economic uncertainty. It enables them to become agile, meet challenges head-on and thrive over the short to medium term.
Pratish Sharma has many years of experience in teaching, initially running technical courses in the era of the IT boom. He qualified as an instructor alongside his programming studies and is a Fellow of the Higher Education Academy.
In 2014 he founded his own software training company and has since taken his passion for teaching around the globe, helping businesses become more data centric, improving their finance functions, and in data analytics. Pratish is an Associate Tutor at London School of Business and Finance.
Over the years he has designed, purpose-built and implemented data management solutions serving many functions, saving many hours, and reducing expenditure.