Critical tips are shared which will help the entrepreneurs reduce their cost during an economic crisis such as Coronavirus. Notably, many entrepreneurs are facing problems like:
- Inefficient production and manufacturing
- High manufacturing and production cost
- No control over labour efficiency and cost
- No control over production quality
- No proper cost optimisation
Following are the tips and strategies that will help the entrepreneurs to optimise their business cost and increase efficiency to recover from losses during difficult times:
# Perform Cost Analysis of Business
Entrepreneurs must analyse the following 4 components of their cost:
### A. Raw Material
Sometimes entrepreneurs do not any pay attention to things such as:
- Can vendors be an alternate source of material?
- How to improve the quality of the product?
- How to reduce cost?
During difficult times, entrepreneurs have to:
- Constantly negotiate the cost of raw material with the vendor
- Negotiate with their suppliers to reduce the cost
- The things that will reduce the cost of raw material and BOM (Bill of Materials) consumption are:
- Source of raw material
- Economic order quantity
- Constant negotiation
### B. Labour Cost
Instead of reducing your labour cost, to increase your efficiency and productivity, you have to optimise your labour.
Do not reduce your labour cost by cutting the number of labourers from 100 to 90. What you have to do is:
- Increase their productivity
- Shift them to alternate or new product
- Reduce per unit labour cost
### C. Variable Cost
It includes utility expenses like electricity, freight and fuel charges.
Take care of variable cost by:
- Reducing electricity bill by reducing electricity consumption
- Reducing fuel cost on diesel generator by increasing its efficiency
- Optimising the fright cost
### D. Indirect cost
It includes the expenses that are incurred on up-keeping of the inventory that you already have.
# Get Prepared to Tackle Difficult Times
Every businessman and employee must understand that they are going through tough times due to Coronavirus, which they have never heard and seen in history.
This will bring more difficulties for businesses when lockdown opens
This year businesses will see less profitability because of no sale for more than 1.5 month
Expenses are not going to decrease, because the government has notified to give salaries to the employees on humanitarian ground
Fixed expenses are also going on because you have to repay the loan even if it is deferred for 2-3 months. It will not be waived off.
You have to give rent of any building whether your business works or not
To cope up the difficult times ahead, every business owner and employee must utilise lockdown period to:
- Think about the plans to lift the business out of losses
- Chalk out the plans to increase sales and profitability
- Make Plans to Recover Business in the Future
Business owners have to make plans to increase profitability and recover from losses:
- by reducing their operational cost
- By increasing production and marketing efficiently
- By reducing inventory size
- By optimising utilization of labour
- By introducing new technology
- By creating a new business
Employees Must Help to Revive the Business
Every employee must help the leadership to increase their productivity to recover from losses in the following ways:
- They must be ready to work extra hours to recover the losses
- They must be ready to work for 12 hours in place of 8 hours
- They must not demand overtime paycheck
Employees must give suggestions to cut the cost on material and increase efficiently
### Morale Boosting
To deal with difficult times, business owners and their employees:
- Should not see negative things
- must keep their morale high
- Keep faith in themselves to bounce back
### Get Prepared with Plan -- B
Every business owner must have Plan-B to tackle the difficult situation if their plan-A fails. Be ready with an alternate plan because you not will get time to think once it is all over.
Even if Plan-B is less profitable:
- It is better than watching your business collapsing
- You can at least save your business by minimising the losses
- Talk to Your Staff Regularly
- Talk to your sales and production staff through video conference during the lockdown
- Talk to your marketing and finance team
- Discuss the post-crisis plan with key people in your company
- Make an annual plan to recover from the difficult situation
- Make a strategy to execute the plan with efficiency
- Make better use of time to make future planning for the company
# Technology
Implement ERP (Enterprise Resource Planning) in your business to control your cost on:
- Inventory
- Consumption and BOM
- Finance
- Production
Small scale industries can implement Tally ERP package, while big companies can implement SAP or BAAN system.
# Avoid Forward Purchase
Forward purchase contracts are not always profitable. Suppliers adjust the prices based on demand and supply. International prices of all commodities depend on oil price which has gone down to unimaginable levels due to the Coronavirus crisis.
In the forward purchase:
- You will need more money
- There will be high risk like forward shares
- It is like playing gamble
So Instead of playing with uncertainty:
- it is better to focus on building a robust business
- Negotiate your cost of raw material from the supplier
- Get into a long term contract with reduced pricing
# Be Updated with Latest Market Trends
You have to continually be abreast of the latest things happening around the world. If you run a mid-sized company, your managers must keep your organisation up to date with the latest happenings in your industry.
Your leadership or management must regularly monitor your business interests through:
- Subscribing journals
- Attending seminars
- These are the platforms to get the best information about your industry.
# Reduce Cost of Production, Not Quality
Reducing the cost of production does not mean compromising the quality of the product.
You have to be quality conscious while reducing your cost.
The companies that compete with others, always compromise with quality. They sacrifice with the important components and quality of raw material to reduce the cost.
Example:
Suppose person A produces a product at Rs 100, and person B produces the same product at Rs 110. If person B reduces its cost of the product to Rs 110 to compete the person A, that means he compromised with the quality, because he does not have the capacity to produce the same product at Rs 100.
# Optimise Logistics Cost
To optimise your logistic costs, take care of these things:
- How much time you have for movement?
- Is your product damaged in the movement?
- How to optimise the time and avoid mishandling?
- How to maintain the quality during movement?
- Optimise the costing that is not important via the below steps:
- Do not take your cost decision based on previous years
- Once in a year call all quotations from various parties
- Check all the prevailing rates of transportation
- Check the discount you can get based on the business offered to the transporters