Cutting Costs Using Effective Systems
Every business wants to make more profit and there are really only two ways to drive this result – increase sales or cut costs.
Most businesses think of cost-cutting as employing less people, producing less waste, or making savings on purchases such as fuel, telephone etc. But these costs aren’t always that easy to implement and rarely produce large increases in costs. In many cases cost savings are reversed once sales increases at a later stage.
Increasing the effectiveness of your business systems is a more sustainable approach to cost cutting, as it allows an increase in production or provision of service for the same or similar cost levels.
What Is A System?
Every business has a set of systems, both formal and informal that govern the operations of the business. These systems can include the processes you use to acquire new clients, customer service procedures, financial control systems and production management methods.
Most people think of quality assurance or corporate policies and procedures when they hear the word “systems”, but in reality every business area has a set of systems that allow it to function.
Systems can be as simple as an unwritten standard way of answering phone calls and referring them to the appropriate people, or as complex as the financial systems that you record cash movement.
A system is basically a set of rules for processing information and facilitating decisions. These rules “lock in” effective or proven ways of doing things and enable future decisions and action to be predictable, consistent and efficient.
The key components of a system are:
1. Outputs or decisions
2. Information required to reach the decision or generate the output
3. Set of rules for processing the information
The ability for a system to generate reliable and accurate information dictates how responsive the business is and at what capacity it can meet customer demands. How effective these systems are in managing your business will have a large impact on the costs of your operations. Improve the capacity and effectiveness of your business systems, and you will increase the capacity of your business. That results in reduced costs.
There are six key areas a business needs to have well laid out systems: sales, marketing, operations, human resources, finance and management.
These systems are concerned with how you manage the customer and the sales process, rather than the process for “acquiring” the customer. They will vary depending on the nature of what you sell, the diversity of your customer base and the requirements of your markets. Typical sales systems will include:
- Dealing and interacting with customers (including documentation required)
- Selling techniques and procedures
- Pricing/terms of sale/credit policies
- Customer records and contact details
- Managing customer complaints
- Product returns/refund policies
These systems are more concerned with communicating with your wider market place rather than specifically with customers or clients. In many SMEs these functions overlap the sales functions, but they must recognised as performing a different function – getting potential customers to your door, as opposed to implementing the actual sale. Systems should include:
- Identification of markets and potential customers
- Methods of communication (promotions)
- Implementing promotional campaigns
- Measuring effectiveness of promotional campaigns
- Review of sales performance against marketing expenditure
These systems often determine the capacity of the business. They include:
Human Resource Systems
- Scheduling rules and procedures
- Maintenance and cleaning procedures
- Machine/process operating procedures
- Performance/production reporting
- Inventory management
- Purchasing procedures
- Quality management systems
- Safety management
- Environmental management
- Transport/logistics arrangements
These systems are often lacking in most SMEs. Their absence or in-effectiveness often contributes to poor productivity for the organisation. Basic HR systems should include:
- Employee details
- Remuneration policies
- Job descriptions
- Company policies and procedures for managing employees
- Training policies and procedures
- Job review and career development
These systems are critical to the survival of any business, and usually are only existent in a basic form. Rarely are these procedures documented and yet the effectiveness of these systems can mean having money in the bank or having creditors wind up the company. Basic systems should include:
- Invoicing / Debtor management
- Cost receipt records / creditor management
- Petty cash management
- Bookkeeping (recording of transactions into accounting system)
- Regulatory reporting (ASIC, ATO)
- Cash flow reporting and management
- Cost/profit reporting
- Finance management inc. working capital
Most businesses do not document these systems, but they usually exist in some form. In most SMEs management systems tend to be maintained by the owner and rarely are other staff involved in them. This presents a bigger problem when the owner is looking to leave or sell the business. Reliance on one person is often a key reason the business is not given its correct or real value. Management systems include:
Impacts of Ineffective Systems
- Budgeting and review
- Business strategy and direction
- Organisational structure review
- Investment management / Dividend policy
- Corporate governance procedures
Many of the sales, marketing and operational systems are directly related to the operations of the business. Failure or ineffectiveness in any operational system usually has an immediate, short-term impact on the business. These impacts can include customers turning away from the business, products unavailable, production or service provision stops or even legal action from failure to comply with regulatory requirements.
These systems are often managed to prevent these impacts, but more long-term damage can occur when other non-operational systems are ineffective or not in place. Disgruntled staff, lack of available cash, poor product or service quality often results from poor support systems.
The lack of an effective business strategy or poor management of business performance often happens slowly over time. New competitors enter the marketplace, quality standards change, inflation and cost increases erode margins and new trends emerge in the market place. All these changes can be identified and dealt with if good management systems are in place. Failure to recognise these things usually means the business is always trying to “catch up”.
Third Party Accredited Systems
It is now commonplace to have quality, safety and environmental systems accredited by an external third party. Apart from allowing the business to display logos to demonstrate some minimum standard of compliance, these systems provide a framework to ensure the effective management of the key objective of the system.
Environmental standards such as ISO 14000 ensure the business has systems in place not only to manage compliance with environmental standards, but also to manage improvement of performance against these standards and how the business acts in the long run to impacts it has on the environment.
Safety management systems are also designed not just to dictate what happens when a safety incident happens and how it is recorded and reported, but also to manage the risks and hazards within the workplace to prevent accidents happening.
QA accreditation is often seen as a heavy anchor around the neck of a business, generating mountains of paperwork and increasing staff costs. But it is actually a framework of policies and procedures to ensure the quality of product or service is maintained at an acceptable standard to the customer and that improvement is managed on an ongoing basis.
Use of third party systems should be seen as a formal means of implementing effective systems across the business. They must be implemented with the right philosophy and culture in place to ensure staff use the systems to maintain and improve quality, not just report on non-compliance.
Often the underlying management framework that third party accredited systems need to have implemented and working support improved operations of other key systems in the business. In some cases accredited systems can highlight deficiencies in other areas of the business. As long as these deficiencies are rectified, the business impact will be a positive one.
What Should a System Look Like?
Every business will have slightly different systems, so they don’t all look the same. But some key characteristics that all business systems should have include:
How Good Are Your Systems?
- Documented and have staff aware of system
- Minimal reliance on individual knowledge
- Some level of automation in data capture, processing and information generation
- Timely operation
- Influence decision making
- Impact or relevance to the core function of the business
- Cost effective – benefits outweigh the costs
A system is only as good as the people who use, but it must equally be designed well and implemented effectively. The best way to determine how effective your systems are is to audit them against the criteria listed above.
The audit should cover:
The key outcomes of ANY system are:
- Existence of systems
- Evidence of outcomes
- Documentation and training
- Support for the systems
- Business benefits
Having a system in place will:
- Consistent and correct business performance
- Less reliance on individuals
- More efficient action than without a system
- Reliable performance
Most important of all is that as your business expands –your system expands with it. The very nature of systems is to provide scale in your operations, which allows you to grow and reduce costs at the same time.
- Minimising effort / efficiency
- Increase consistency
- Increase productivity
- Increase capacity
- Cut your overall costs
- Assist succession planning