Challenging market and rising costs put businesses into a non-stop race for efficiency and expense reduction. Cost management and identification of real expenditure sources in the production process are among the highest priorities for Financial Planning and Analysis (FP&A) and the entire finance department in almost every company.

Methods of optimising direct costs in many places are largely exhausted. Businesses are now focusing on indirect or unassigned costs. Finding what is behind them, deciding how they can be attributed to revenue streams (products or customers) and, most importantly, optimising and reducing them – answers to these questions are often found using different cost allocation methodologies and implementing different tools.

Having worked in the Profitability and Cost Management area for many years, I have seen great successes: companies unhiding and saving millions of dollars, pounds and euros. Sometimes by using very complicated methods, in other cases with simple - but well-organised approaches - FP&A analysts helped to achieve very impressive optimisations of cost. 

It is worth noting that the main step on the way of saving is to identify places and reasons for the cost to be generated. A big part of expenses was reduced just by finding out that companies are paying a lot for facilities or services they don’t use or use inefficiently.

Another important element is creating responsibility for the charges by product owners or channel leads. As soon as the indirect cost from a general bucket is attributed to a business stream, sales or product managers become active partners in the optimisation of indirect cost as well as “their own” direct costs.

A direct impact of cost awareness and ownership is immediately seen in the planning process within many organisations. When building their budgets, companies include indirect cost allocation as a mandatory step in budget submission and approval. As a result, optimisation and improvement are applied in the early stages, helping to avoid waste. A reward is obvious – higher profitability leads to bonuses and dividends for stakeholders.

There is one more very important aspect of reducing a cost. Not yet included in mandatory metrics measuring company performance in most countries and industries, it will become one of them very soon. I’m talking about the environmental footprint of a company. It is a part of ESG (environments, social and governance) as well as Corporate Sustainability reporting. A requirement to reflect the use of natural resources has become a focus for investors, stakeholders and company managers, so more and more businesses are starting to analyse their impact on the environment.

Examples of the link between cost optimisation and reduced use of resources are everywhere. Improvements inside the logistics chain (materials delivery or in-process products move) will help to lower fuel consumption. Together with cost savings, this takes carbon and nitrogen pollution down. 

Optimisation of space for offices, storage and retail will reduce the use of electricity for lighting, heating and cooling. Altogether, this results in lower utility costs in the company’s P&L, with the added benefit of a reduced carbon footprint. Offices located outside the busy city centre make rent or lease cheaper and contribute to releasing the overload on megapolises transport infrastructure. Planning efficient use of equipment helps to save energy on the start/stop activities or idle running. 

An area of wasted stock and product shelf life, especially in the food industry, is not just a large component of consumer price but also huge damage to nature. Identifying this cost and making channel or store managers directly responsible for its control is a way to improve the situation.

An example from the industry I’m working in is the use of Cloud technologies. The economic effect of Cloud Services is enormous. Companies that transfer their processes from their own data centres and infrastructure to the cloud report cost savings in hundreds of per cents. A large part of this saving is in energy bills which is, at the same time, a very good environmental score. Compared to the company’s own servers and network equipment, energy use in centralised cloud data centres is much more efficient. Their location away from industrial and urban centres avoids a peak use of the energy grid, as well as a design of space which allows better performance of cooling systems.

This list can be continued. 

Summary

What I wanted to highlight in this article is the clear link between the profitability of companies and their environmental responsibility. FP&A is working hard to identify and associate enterprise costs to revenue streams – this gives a way to improve a business value by setting up owners to all the organisation’s costs. At the same time, responsible use of resources, careful planning and control play important roles in creating sustainable businesses which aim to be part of the future world.