Newport Board Group, a CEO Advisory Firm, Advises CEOs on 10 Steps to Reduce the Costs of Running a Middle Market Company

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Even in an Expanding Economy, Controlling Costs is Critical to Growing a Buisness

Through technology and the emergence of the outsourcing industry, companies can reduce costs, increase efficiencies, and increase profits to be in a better position to deal with the inevitable cyclical economic downturn.

The general rule of business is to control costs, increase revenues, and maximize profit. Simple, but difficult to implement in weak economic times as well as in recovering economic times, such as we are experiencing now in the United States. As revenues increase, the tendency of businesses it to add workers, purchase technology, and increase inventories. However, many companies grow themselves out of business by diverting cash into fixed assets and inventory investments in anticipation of expanding sales.

One way to avoid this situation is to reduce and control non-strategic costs. Through technology and the emergence of the outsourcing industry, companies can reduce costs, increase efficiencies, and increase profits to be in a better position to deal with the inevitable cyclical economic downturn.

The following are 10 ways to reduce costs in the light of what the current circumstances are (not what they used to be):

1. Manufacturing

The economics have changed substantially between producing goods in China and in the United States. A recent study indicated that offshore manufacturing companies are looking at a 15 to 20 percent average wage increases and will reach wage parity with the United States by 2017. Energy costs outside the country are growing quickly as conversions from coal to natural gas are implemented in China.

Consider onshoring manufacturing back to the United States to reduce costs and better manage operations without different time zones, cultural barriers, and increased freight and inventory investment. The relative costs have almost come full circle.

2. Freight and Packaging

Look at the trucking or small package competitive landscape for cost savings. Make sure the business is taking full advantage of full truckloads on the outbound. Take a look at the established minimum values for shipping levels to customers. Look at how much uplift the shipping charge can provide when you pay the shipping bill and recover the uplifted shipping charge from the customer.

3. Finance and Accounting

The cloud simplifies outsourcing of accounting and makes cost reductions easier to achieve. This makes a lot of sense if the business is having to scale up, or if the business does not have accountants on staff to improve reporting or make sure that the business is GAAP compliant.

4. Human Resources

A Professional Employee Organization (PEO) can help process the payroll of the business and offer employees a better offering of benefits. In addition, by pooling with other companies through a PEO, a company can get significant pooling discounts on the cost of benefits. Additionally, someone else takes responsibility for the maze of changing HR regulatory issues including ACA compliance.

5. Legal Fees

If the company is involved in litigation, patent work, IPO introduction, or corporate reorganization, a CEO will need to hire a legal specialist. That specialist will be housed in all likelihood in a top law firm and their hourly charge rates are significant. Don’t, however, fall into the trap that you need to pay those rates for corporate counsel work. Legal fees are negotiable and many firms will fix the fee for basic corporate work or accept a fixed monthly retainer for basic legal services.

6. Bank Fees

If the company is a small or medium-sized concern and working with one of the national clearing banks, ask why? These large banks are loaded with professionals to help large companies with complex international transactions, technical work such as risk and derivatives management, and other complex financial instruments, but these services may not be what you need to run your emerging growth company. Their rates are about twice the rate of a local or regional bank.

7. Insurance

When was the last time the business had a competitive quote from an alternative insurance broker? Insurance companies will only allow one “broker of record” at a time. Insurance brokers naturally form strong relationships with specific insurance companies, if for no other reason than volume brings additional discounts.

Put your insurance needs out for bid to two brokers and insurance companies, and consider higher retentions and lower coverage limits if higher limits are not needed.

8. Audit Fees

The big four audit firms are similar to the large national clearing banks. These audit firms are set up with research groups and power groups to deal with complexity both driven domestically and internationally, and have commensurate high-level fees.

The fee levels can be put into four groups: the top four, the next 3 national firms, regional firms, and small local CPAS. Make sure a CPA firm appropriately sized for a business performs your audit. The hourly rates are dramatically different between larger and smaller firms.

9. Social Marketing

Your website, social networking, and LinkedIn usage can save the company enormous sums for marketing the company. Look at the outbound marketing costs and see what can be substituted. Advertising budgets, trade show involvements, and general events are prime areas for trimming or eliminating while effectively using enhanced inbound marketing approaches.

10. Selling to the Right Customers

Analyze the customer base. Companies have highly profitable customers, somewhat profitable customers, and outright loss makers. The loss makers are obviously the ones companies want to convert or ditch. Smart firms will not only rid themselves of loss-making customers but, by mapping the onboarding sales prospect process, incorporate activities and incentives for salespeople to bring only profit-producing customers on board. Whether reducing the selling cost or diverting resources to attain more profitable sales, the company will be moving to increase the cash and the profitability of the firm.

Taking advantage of just a few of these cost reductions will truly increase substantially the cash and profits savings of the company.

Michael Evans and Peter Duff are partners in Newport Board Group

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