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  • Writer's pictureArvind Dang

79 additional Cost reduction opportunities in Corporate F&A function under the direct control of the CFO.



The following tabulation lists 79 cost-reduction opportunities (in addition to the 99 already identified).


Additional Opportunity for cost reduction

No of opportunities

Product, spares, and after sale service pricing

3

Engaging consultants)

5

Cash inflows

8

Cash outflows

15

GST(Goods and service tax)-India context

44

Income tax-India -context

5

Imports duty-India-context

6

Statutory payouts-India-context

2

Employees cost-related

3

Depreciation related,

3

Bank Guarantees -BG/Bonds submitted

6

write-offs

14

Expense control

3

Others-recovery

2

Grand total

79

Approach followed.

Staying focused on the cost reduction  areas, closely examining the following aspects and following the 5W2H approach to identify cost reduction opportunities while ensuring speed of process execution

And ensuring statutory compliances

 

Highlights of 79 opportunities

 

 1.        Cost-saving opportunities-3

a.   Product Pricing

b.   spare Pricing and

c.    after-sale service pricing  

 

 

a)For end-product pricing

Following three steps i, ii , iii as below

i) Computing net manufacturing variable costs accurately based on the sum of the below cost elements:

  • ·      Current landed costs of the direct bill of materials -BOM consumed

  • ·      Cost of direct consumables, oils, and lubricants.

  • ·      Cost of direct labour

  • ·      Cost of direct power

  • ·      Cost of direct tools, etc.

  • ·      Cost of direct inspection & testing

  • ·      Cost of maintaining Quality Standard certification/marking (like Indian Standard number ) on the packing /label of the product

  • ·      Cost of rejections of BOM

  • ·      Cost of job working paid to out-sourced manufacturer /service provided

  • ·      Net manufacturing variable costs  = sum of above

ii) Computing net marketing variable costs accurately:

  • ·      The direct cost of out-ward freight & forwarding

  • ·      The direct cost of outgoing marine insurance

  • ·      The discount on the price

  • ·      The incentives payable to the customer or channel partner for the product  model 

  • ·      The commission payable to the channel partner/agency

  • ·      The cost of free services rendered, including spares and labor

  • ·      The warranty costs

  • ·      The direct cost of logo/brand on the packing

  • ·      The direct costs of the owner’s manual and service manual in hard or soft copy

  • ·      The cost of pre-dispatch inspection

  • ·      The cost of warehousing before dispatch

  • ·      net marketing variable costs = sum of above

 

iii)Determining the Contribution as below.

  • ·      Net sales realization value (net of taxes)

  • ·      Less net manufacturing variable (costs borne by the company)

  • ·      Less net marketing variable costs (borne by the company)

 

Opportunities for cost savings =1

The CFO can review and ensure that the contribution to products sold is positive and meets industry standards or better. 

 b)For spares  pricing

Following three steps i, ii, iii, exactly similar to the product as above

 

Opportunities for cost savings=1

 

The CFO can review and ensure that the contribution on spares sold is positive and is as per industry standards or better.


c)For pricing of after-sale services, including spares supplied) –

 

Like product -troubleshooting or technical services (say through company-owned service outlets )

 

i) Computing net materials and service costs accurately based on the sum of the below cost elements:

 

  • ·      Costs of Spare parts consumed

  • ·      Oils and lubricants

  • ·      Direct Man-hours  consumed for each troubleshooting :

  • ·      Third-party tools  taken on hire

  • ·      Pro-rata cost of troubleshooting Software

  • ·      External resources directly engaged for specialised service rendering

 

ii) Computing net marketing variable costs accurately:

 

  • ·      Help-line operating costs

  • ·      Content marketing expenses

  • ·      Social media costs, like pay-per-click (PPC) advertising costs, are incurred by companies for promoting services.

  • ·      Marketing materials used at company-owned service outlets

  • ·      Event marketing to promote  company-owned service outlets

 

iii)Determining the Contribution as below.

  • ·      Net services (rendered) realization value (net of taxes)

  • ·      Less net materials variable (costs borne by company-owned service outlets)

  • ·      Less net marketing variable costs (company-owned service outlets)

 

 

Opportunities for cost savings =1

 

The CFO can review and ensure that the contribution to services rendered by company-owned service outlets is positive and meets industry standards or better.





2 Cost-saving opportunities- Engaging consultants=5


Opportunities for cost savings=5

 

Negotiating following aggressively

1 Lump sum fees aggressively -stage-wise but based on a well-defined scope of work and after obtaining 3-5 bids

2 Payment terms linked to deliverables rather than monthly/dates linked.

3 Free days to be devoted by the consultant at the client’s work sites

4 Fee rate /day for different levels beyond lump sum fees in case the scope of work increases or time overruns

5 Clearly defined reimbursement rates for travel -including class, types of hotels, conveyance charges, any out-of-pocket expenses, etc

3. Cost-saving opportunities- Cash inflows=8

Cash inflows can be of 4 (four) types, as below.

·      A) Cash inflow from operations (4)

·      B) Cash inflow from Investing activities (1)

·      C) Cash inflows from Financing activities (2)

·      D) Cash Inflows from overseas (1)

 

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A) Cash inflow from operations

 

Opportunities for cost savings=4

1 offer early payment incentives to customers.

2 Negotiate a payment inflow mode such as below to enable faster collection & lower payment processing costs vis a vis conventional cheque method,

  • ·      NEFT or RTGS

  • ·      UPI transfer

  • ·      Auto debit for recurring inflows or any other

3 Set up automated payment reminders to customers by email/(dunning in SAP) or advance SMS to reduce expensive manual follow-up costs and delays

4 minimize cash collection/cash handling to minimize security risks and theft.

 

B) Cash inflow from Investing activities

 

Includes Sale of fixed assets, Sale of company securities, Divestitures, Repayment by borrowers

Opportunities for cost savings =1

1. Direct deposit of the amount into the company’s bank account, eliminating cheque /instrument processing fees and time.

 

C) Cash inflows from Financing activities

Includes dividends/return on investment in equity, receiving stock value against equity stock, bonds, etc.

 

Opportunities for cost savings=2

 

1.Negotiate a payment inflow mode such as below to enable faster collection & lower payment processing costs vis a vis conventional cheque method i.e. NEFT or RTGS, or UPI transfer or Auto debit for recurring inflows

2.Direct deposit of due amount into company account

 

D) Cash Inflows from overseas, such as from customers, JV, etc

 

Opportunity for cost savings =1

·      1a) For inflow from regular customers, maintain currency accounts in relevant markets to avoid foreign currency transaction fees when receiving payment in FC.

·      1b) For equity inflow from JV, establish a payment method with a hedging strategy for exchange rate fluctuations. 

4. Cost-saving opportunities- Cash outflows =15

 

Cash outflows can be of 4 (four) types.

 

·      A) Cash outflow from operations (7)

·      B) Cash outflow from Investing activities (4)

·      C) Cash outflow from Financing activities (1)

·      D) Cash outflow to overseas (3)

A) Cash outflow from operations

 

Opportunities for cost savings=7

 

1 For vendors/contractors/service providers, install ERP system/solution for auto-generating three-way matched, due amount & due date, thus reducing expensive manpower cost

2- Establish auto payment vouchers and e-credit to the vendor to eliminate the making & forwarding method

3 Negotiate more extended credit periods to enable ease of working capital and thus reduce the need for borrowing.

4 In case of surplus funds, negotiate early payment terms discount and associated discounts.

5 For advance payments, negotiate to obtain bank guarantees with BG cost borne by vendor/contractor and protect risk.

6 Negotiate alternate payment methods like credit cards or online transfers to ensure timely payouts and enhance good vendor relations.

7 In case of a large number of employees -like workmen in the factory, explore installing ATM inhouse to avoid costly cash payments & employees taking part of the day off to draw cash.

 

B) Cash outflow from Investing activities : includes cash outflow to:

Vendors, towards the purchase of assets, purchases of securities of other companies, investments made, M&A acquisitions, etc.

 

Opportunities for cost savings: =4

 

1 For vendors/contractors/service providers, install ERP system/solution for auto-generating three-way matched, due amount & due date, thus reducing expensive manpower cost

2- Establish auto payment vouchers and e-credit to the vendor to eliminate the making & forwarding method

3 Negotiate more extended credit periods to enable ease of working capital and thus reduce the need for borrowing.

4 For M&A payouts, consider deferred payouts linked to stages of work completion rather than time-based.

 

C) Cash outflow from Financing activities:

 

This includes cash outflow for Dividend payout to shareholders, Redemption of shares by the customer and associated cash outflow, buying of treasury stocks, buying of bonds/other debt instruments, and short-term debt payments.

 

Opportunities for cost savings=1

 

1 For such payments, make payment online on the last day of the due date to maintain liquidity and save interest.

D) Cash outflow to overseas vendors, etc.

 

Cost-saving opportunities =3 

 

1. Negotiate payment methods like documents through the bank or online by Swift or LC, etc

2 negotiate bank charges outside the payee account and inside India to the payer account.

3 In a difficult liquidity situation, even in the case of LC, negotiate Usance LC ie, LC with an extended period like 45/60/90 days with a relatively lower Libor rate +1-3 % markup as interest rate.

Libor is now being replaced by SOFR-Secured overnight financing rate in case of USD

 

 5 Cost-saving opportunities- GST =4

Cost saving opportunities =4

 

·      1 Optimize Input Tax Credit (ITC) Utilization by reconciling each vendor’s invoices for materials and services received

·      2 Reduce the impact of the Reverse Charge Mechanism (RCM) by exploring ways to bring suppliers/service providers under the GST registration net to avoid paying GST under RCM (where the buyer pays tax on behalf of unregistered suppliers).

·      3 Availing Composition Scheme Benefits (applicable for small businesses)

·      4 Explore GST Incentives by utilizing any Govt scheme applicable

 

6. Cost-saving opportunities- Income tax=5

 

 Cost saving opportunities =5

1. while making payments to local or overseas consultants service providers, deduct TDS at the correct rates & deposit tax timely to avoid penalties

2. Identify and claim all eligible income tax deductions, such as below under the Income Tax Act.:

§  Depreciation on business assets

§  Interest on business loans

§  Research and development expenses

§  Donations (within limits)

     3. Maintain proper documentation to allow all expenses to be eligible. 

4. Timely payment of advance tax to avoid penalties   

    5 -Based on input from a tax advisor, choose the appropriate depreciation method (like double declining balance method-DDBM) offering higher depreciation in the initial years for specific assets


7. Cost-saving opportunities- Imports duty =6

Cost reduction opportunities=6

 

1. Ensure the correct HSN number of material to be imported on the Bill of entry (BOE) to enable correct custom duty rates

2 Ensure accurate valuation of imported materials on BOE  to avoid penalty & % loading that increase imports duty  case of

3. Avail concessional rate of imports duty, where eligible, like project import or R&D, etc

4 Avail benefits offered by FTA-Free trade agreements, if applicable, to reduce duty

5 utilize the advance authorization scheme to import raw materials duty-free, in case of finished products meant for export.

6. Choose the appropriate port with less congestion and lower port charges to reduce demurrage

 

 8. Cost-saving opportunities- statutory payouts =2

 

There are different types of statutory dues payable /to be deposited, such as Provident Fund, ESIC, License fees, Registration charges of statutory bodies, GST, Income tax /TDS, Property tax, And so on.

 

Cost optimization opportunities =2 

 

1 Pay statutory dues on time to avoid late payment charges.

2 File returns on/before the due date to avoid penalties.

 

9. Cost-saving opportunities- Employee costs related =3


   Cost-saving opportunities =3

 

·      1 Influencing HR team to carry out benchmarking for pay packages and annual increases to bring sanity in costs to the company.

·      2 Insisting on implementing a robust annual performance-based system based on competencies and quantifiable KPI/measures.

·      3 Ensure payouts such as below are designed /configured to comply with statutory & taxation requirements: Employee benefits packages, such as Travel, Health, Bonuses, ESOPs, etc.,

 

10. Cost-saving opportunities- Depreciation related =3


Cost-saving opportunities =3

·      1. Choose the appropriate depreciation rate for each category of asset to determine

taxable income correctly.

·      2. Ensure correct asset classification into different types of assets and accordingly

account for proper accounting of costs as per accounting standard

 

·      3 Ensure proper categorization of the nature of expenses

·      a) pre-capital,

·      b) capital,

·      c) maintenance of fixed assets, or

·      d) non-capital, 

 

11. Cost-saving opportunities- Receiving and issuing Bank guarantees and Bonds =6


a)   Bank guarantees are received from vendors or channel partners and customers per the agreement's terms.

Cost-saving opportunities =3


·      1 Negotiate that vendor/ channel partner /customer bears the cost of establishing BG

·      2 Monitoring timely extension or lodging of BG to avoid its lapsing and financial risks to

the company.

·      3 Safekeeping BG to avoid loss

 

b) Bank guarantees to be given by the company, e.g., to say, statutory bodies or large customers or Bonds to be given to

 

 Cost-saving opportunities =3

 

·      4 Negotiate cost sharing with the vendor for establishing BG

·      5 Monitor timely extension to prevent its encashment by the client.

·      6 Timely vacating of the bond submitted to Statutory agencies like Customs authorities for imports or exports, SEZ commissioner, etc.


12. Cost-saving opportunities- write off related=14

A)Inventory Write-offs

 

Cost-saving opportunities =3

·      1 Ensure write-off documents are  properly  authorized and fully supported

·      2 Verify Inventory physically before Write-off and  quarantine it for disposal

·      3 Ensuring implementation of inventory control systems such as below to minimize inventory loss/write-offs :

  • ·      ABC classification of inventories

  • ·       Coding,

  • ·      perpetual verification,

  • ·      MRP2/ERP Software-based ordering system of materials,

  • ·      FIFO,

  • ·      secure  storage to reduce damage or theft


B)Asset Write-offs

Cost -saving opportunities =6

 

·       1 Implement periodic verification & Asset numbering and

·       2 Proper installation & Safekeeping of assets to prevent damage

·       3 Timely preventive maintenance to avoid breakdowns

·      4  For high-value assets, carry out  periodic residual value assessment

·      5 Ensure the write -off  document is comprehensive to incorporate residual life, Quality output, and productivity rate  by the technical team 

·      6 Negotiate Disposal of written-off asset based on 3-5 quotations

 

C) Bad Debts write off

 

Cost saving opportunities=5 

 

Installing a robust credit control system :

·      1 Establish  customer-wise credit limits

·      2 The system does not allow further billing if the credit limit has been exceeded.

·      3 Automate dunning/reminders to customers for recovery of receivables

·      4 Robust monitoring of aging of receivables-customer wise

·      5 Putting in special recovery efforts for high amounts of receivables


13 Cost-saving opportunities- Expense control =3

Cost-saving opportunities =3

 

1 Institutionalizing a robust budgeting system –for P&L and balance sheet and Cash flow

2 Developing through IT/ERP robust dashboard/MIS system & in place and monthly monitoring of Budget vs. actual status on MTD and YTD

3. Ensure Cost reduction/cost saving as a critical KRA in each business function

 

14. Cost-saving opportunities- Others-recoveries =2

In addition to customer receivables, there can be different types of recoveries, such as:

 i)Government Incentives, export benefits, Insurance claims lodged, and debit notes on vendors, channel partners, employee loans & so on  

 ii)Outstanding materials, like sales exhibition materials, job work or returnable materials & so on

 

Cost saving opportunity (2)

1 Periodic reconciliation and monitoring all such dues or materials/assets

2 Timely follow-up and recovery


The way forward –Implementing cost reduction.


1. Promote a  Cost-Conscious Culture by making cost reductions an essential KRA across the organisation.

2 Deep Dive into processes/activities of each sub-function and follow the 5W2H approach of Japanese

3 Embrace cost & spend  Analytics. 

4 Periodically benchmark costs in the Industry.

5 Challenge Every Cost or expense.

6 Explore Outsourcing Options.

7 Renegotiate fees/charges with service providers, consultants, and vendors.

8 Install a system for monitoring MTD/YTD Budget vs. actual costs.

9 Automate Manual Processes

 

 

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