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

The author has identified 99 cost-reduction opportunities as per the following tabulation.

Further, seventy-nine 79 more cost reduction opportunities have been identified by this author in 14 more aspects in F &A areas, but these will be taken up in another article .

Approach followed.

Staying focused on the priority areas and closely examining the following aspects in each process while ensuring no compromising on quality or customer service

·      Basic rates/fees negotiation or expense reduction

·      Covenants or terms and conditions

·      Payment terms

·      Speed of process execution

·      Statutory compliances

In the last part of this article, the way forward is proposed for implementing cost reduction

Highlights of 99 opportunities

For more details, refer to chapters  3, 4,5,7, and 8 in my second book, “Profitability and Ethics”-The Key Ingredients for Business Success and available at Amazon through the links below.

Paper back-amazon link: India

https://www.amazon.in/Profitability-Ethics-Ingredients-Business-Success/dp/8119682815/ref=sr_1_2?crid=GBADLFG6NXNN&keywords=Arvind+dang&qid=1699244235&sprefix=arvind+dan%2Caps%2C207&sr=8-2

Book 2-paper back-Amazon link-Global

https://www.amazon.com/Profitability-Ethics-Ingredients-Business-Success/dp/8119682815/ref=sr_1_2?crid=3FTCUAI7PVPVU&keywords=arvind+dang&qid=1701668542&sprefix=arvind+dan%2Caps%2C320&sr=8-2

A)   Cost-saving opportunities -Long-term borrowings related =21

i)Interest and fees or charges (2 opportunities)

1.   Negotiate Interest rates aggressively based on 3-5 competitive 

Bids & pre-made check lists

2. Negotiate the below charges aggressively. 

                                          i.     Prepayment penalty/ charges

                                          ii.     Loan restructuring fees.

                                         iii.     Documentation charges

                                         iv.     Processing fees

                                         v.     Legal fees,

                                         vi.     Administrative fees

                                       vii.     Loan rescheduling charges.

                                     viii.     Cheque or electronics clearing service(ECS) charges.

                                         ix.     Default interest rates

                                          x.     Late payment charges

                                         xi.     Sharing of Stamp duty & other statutory charges

                                       xii.     Charges toward detailed security documentation & collateral

ii)Covenants related (13) opportunities = (3+4+3+3)

Financial covenants=3: - Negotiate following aggressively

• 1 Debt-service coverage ratio reflecting borrower’s ability to generate sufficient funds to meet debt obligations & also negotiating penalty for violation.

• · 2. An interest coverage ratio reflecting the borrower’s ability to meet interest payments vis a vis EBIT and negotiating a penalty for violation.

• · 3 The leverage ratio limiting the borrower’s total debt to its equity or assets & also negotiating penalty for violation.  

And so on

Operational covenants=4: Negotiate Penalties aggressively

for any violation of the following, as these can significantly impact operations,

• ·      1 Limitation on capital expenditure

• ·      2. Restriction on M&A without the lender’s consent

• ·      3. Dividend restriction to disburse dividends to shareholders.

• ·      4. Control over the changes in ownership and expecting borrowers by insisting on the lender’s prior consent.

      And so on.

 Negative covenants=3: Negotiate penalties aggressively

for violations.

• ·      1. Restriction on additional debts/securing other loans.

• ·      2. Lender’s prior consent before Sale or transfer of assets

• ·      3. Restriction on making significant changes in business operations.

Reporting covenants=3: Negotiate penalties aggressively for violations

• ·      1. Periodic financial statements such as Balance sheets, income statements, and cash flow statements

• ·      2. Compliance with financial covenants

• ·      3 . Notice of default in case of any default of agreement terms And so on

iii) other cost reduction ideas related to borrowings (6 opportunities)

• ·      1. Explore alternate lower interest rate borrowing options like debenture, bonds, or Govt. schemes.

• ·      2. Negotiate Credit assessment charges to enhance credit ratings to qualify for lower interest rates.

• ·      3. Negotiate hedging costs for foreign currency-related ECB/Overseas loans.

• ·      4. Negotiate fixed consultancy fee + success fee contingent on long-term loan approval and disbursal

• ·      5. Negotiate Expenses for charge creation

• ·      6. Establish strong internal controls to prevent potential unethical activities caused by collusion.

B) Cost-saving opportunities- IPO related for raising Equity =7

• 1 Underwriting fees: Negotiate aggressively with investment bankers.

• 2. Legal & accounting fees: Negotiate aggressively with reputed IPO dealing firms

•     3. Road shows expenses. Use a mix of online & traditional   methods.

•     4. Printed media expenses: Use alternate digital marketing      material.

•    5. IPO approval timelines: Initiate timely documentation & approvals

•   6. IPO Listing fees.  Pursue a mix of stock exchanges with lower listing fees.

•   7. Initial offer size Consider a smaller initial offering & subsequently follow-on offering.      
  

C) Cost-saving opportunities- M &A related =29   

  Realize savings as summarized below.

i)Consultant fees for Due diligence =6

Negotiating aggressively fees & terms such as: Scope of work, deliverables, timelines, payment terms with following.  

• ·      1lawyers, investment bankers, risk managers, and tax professionals

• ·      2 Sales and marketing professionals

• ·      3 Technology consultants.

• ·      4 Management consultants

• ·      5 Human resource management consultants

• ·      6 Legal firms

Deducting any shortfall in the quality of deliverables or non-deliverables from due bill

ii) BID /Purchase Price for the target company =2

1     Negotiating bid price aggressively (including taxes) & using market intelligence too and considering the following methods to arrive at the Offer price.

• ·      Comparable company analysis (Price-to-earnings ratio, Price-to-sales ratio, Enterprise value to EBITDA,

• ·       Comparable transaction analysis (similar to above for recently acquired co)

• ·      Discounted. Cash flow analysis -5 years

• ·      Assets-based valuation -5 years

• ·      Industry-specific

• ·      Any other proposed by consultants 2 Review closely representations and warranties offered by the target company.  

iii) Bid/Purchase Terms =12

   Negotiate aggressively. 

• 1. The financial structure of the proposal : A)Stock purchase option, B)Assets purchase option, C)Both, D)Any alternative

• 2 Payment terms  for M&A -down payment and progressive based on milestones

• 3 The need to retain part of the Purchase  Price in Escrow  account towards unresolved liabilities of the target company

• 4 Financing break fee, i.e., the amount payable to the Target company  in case the M & A deal fails due to financial issues

• 5 Exit clause

• 6 Key manpower to be acquired from the target company  and costs

• 7. Labour contracts/union agreements  related to costs

• 8. Restrictions, particularly those affecting post-merger operations of the acquiring company

• 9. Employee emoluments changes, transfers, retirement age, and  pension matters

• 10. Regulatory approvals costs-sharing, responsibilities & timelines.

• 11. Change management costs for smooth Integration between the acquiring company and the target company

• 12. Costs related to delays in Merger vis a vis negotiated timelines 

iv)Statutory approval costs =5

Optimizing the charges/costs related to approvals from:

• 1  SEBI for listed companies’ other requirements. 

• 2 RBI in case M&A involves foreign investment or cross-border foreign exchange in terms of the FEMA Act,1999,

• 3 Sector-specific approvals from bodies like the National Company Law Tribunal (NCLT) for schemes of amalgamation or merger under the Companies Act 2013

• 4 Shareholder  of the plans of M&A

• 5 Tax authorities  vis a vis Capital Gain tax, transfer pricing, indirect taxes

v) Post-merger integration costs (4)

Review and optimise

• 1 Costs  towards  additional working capital requirements ( post-merger) to support the combined entity,

• 2 Training costs for acquired employees/channel partners, etc

• 3 Cost of funding additional capital requirements

• 4 Costs of meeting key vendors, channel partners, key customers, and other business associates across different cities/states/countries  to share key highlights of the merged company and so on

D) Cost-saving opportunities- Investments related =21

i) Direct Equity Investment=3

In the Indian context, Investors can directly invest in stocks listed on the BSE or NSE through brokerage firms such as Zerodha, ICICI Direct, HDFC Securities, Sharekhan, etc.

Investors need to choose brokerage firms carefully and negotiate aggressively to enable cost minimization of

• 1. Transaction costs include brokerage fees and taxes. 

• 2. Taxation including a)   short term Capital gain-(STCG) is currently 15% for AY 2024-25 b)   Long-term Capital gain (LTCG) is currently 10 % for AY2024-25.   If gains exceed >   Rs 1Lac for stocks held more than 1 year. Limits & Rates may change at the discretion of the Govt.

• 3. Consultant fees: This needs to be factored in for engaging investment consultants  for the evaluation of high-value investments in stocks of various companies, including equity stocks in overseas funds

ii). Mutual Funds=5

In India, various types of MF are available: a)MF (mutual funds) -Equity funds, and b) MF-debt funds. c MF-Hybrid funds

Investors need to choose MF that maximizes return and choose brokerage firms and negotiate aggressively to minimize the 5 types of transaction costs such as below.

• 1 Investment Fees: 

• 2 Exit Loads: 

• 3..Account Maintenance Fees: 

• 4  Consolidate Accounts: 

• 5. Taxation –STCG  and LTCG are similar to those captured for equity in the previous slide  & hence, not duplicated  Investors can choose instruments that offer tax-advantaged funds. 

ii) Derivatives=2

An equity derivative is a financial instrument whose value is based on equity movements of the underlying asset and offers high returns but high risks as well 

 Derivatives trading, including futures and options, occurs on BSE and NSE. These exchanges offer a wide range of derivative products & can use Choice 1 or 2

Choice 1 PUT = which is a bet that stock will fall vis a vis a strike price

Choice 2 CALL= which is a bet that the stock will rise vis a vis a strike price

Investors need to exercise diligence and choose Derivative products that maximize return & minimize costs

Costs :(2 types)-

• 1Transaction costs and margin requirements.

• 2 Taxation:  Profits and losses from derivative trading are treated as speculative income and taxed according to tax rates.

iii) Index Funds =2

Index funds in India typically track popular indices such as the Nifty 50 (NSE), Sensex (BSE), and other sectoral indices listed on the BSE and NSE.

These  are typically purchased through stock exchanges such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE) 

Below are a few popular “Index funds” in India historically known for their strong performance.  

·      ICIC Prudential Nifty Next 50 Index fund,

·      UTI Nifty Index fund,

·      SBI Nifty Index fund,

·      HDFC Index fund,

·      Mirae Asset Large Cap Fund

Investors must exercise diligence and choose Index funds that maximize return & minimize costs.

Costs (2 types) 

• ·      1Charge expense ratios to cover management fees and operational costs.

• ·      2 Taxation –STCG  and LTCG are similar to those captured for equity in the previous slide  & hence, not duplicated
  

v).ETFs (Exchange Traded Funds=2

1 ETFs are listed and traded on stock exchanges like BSE and NSE. Investors can buy and sell ETF units during trading hours. ETFs often track benchmark indices like the Nifty 50, Sensex, and sector-specific indices

A few examples of ETFs are:

·      Nippon India ETF nifty 50,

·      SBI ETF Nifty 50,

·      UTI Nifty Next 50 Index, 

·      IDBI Gold ETF (which monitors Physical Gold prices),

·      Kotak Banking ETF(tracks Nifty bank index).

 Investors must exercise diligence and choose ETFs that maximize return & minimize costs.

Costs: (2 types)

• 1Charge expense ratios to cover management fees and operational costs.

• 2 Taxation –STCG  and LTCG are similar to those captured for equity in the previous slide  & hence, not duplicated

vi)-Others =7

        a)FD/debt instruments of different durations =1

        b)Real estate-6

a) FD/debt instruments=1

Debt instruments include  fixed deposits, Term deposits, recurring deposits etc :

Investors must exercise diligence and choose the bank or company they will invest in and the FD or debt instruments that maximize return and minimize costs.

 Costs (1 type)

• 1 Usually no costs for opening but can be penalties /charges towards pre-mature closure or reducing the principal amount.

a)   Real estate=6

 Real estate Investments can include the following:

•  Land buying.

•   Residential buildings

• Commercial buildings,

• Hospitality,

• Educational institutes and so on

 Investors must exercise diligence and choose the type of real estate investment planned to meet their purpose that would maximize return and minimize costs.

Costs reduction (6)

• 1. Brokerage costs

• 2. Surveyor’s fees

• 3. Advocates/lawyer fees for documentation and title verification

• 4. Statutory licenses or registration fees

• 5. Land use change fee

• 6. Development charges

E Cost-saving opportunities- JV related=14

Negotiating aggressively cost-impacting aspects.

• 1. Lump sum knowhow fee for import of Design, drawings

• 2. Pricing  for import of  Inhouse produced or bought out BOM from JV

• 3 JV Formation Expenses  & cost-sharing

• 4 The Initial capital contribution by each partner

• 5 Free Training overseas & India

• 6 Training costs beyond free days: man-day- rate and fee for those chargeable

• 7 Expatriate  emoluments (salary and reimbursements entitlements)

• 8 Payment remittance methods( for each type of remittance):

• 9 Payment terms for different remittances: ckd/skd/spares etc

• 10. Currency: USD or as applicable

• 11. Expense sharing formula for ongoing costs of JV –

• 12. Pricing for  future export of materials

• 13. Fees for export of services or manpower from India

• 14.Tax Sharing: Negotiate a tax-sharing agreement that allocates tax

•  

F Cost-saving opportunities- Royalty related =7

Negotiating the  following  aggressively vis-a-vis Royalty

• 1 Computation formula: % and Definition of Net sales on which payable

• 2 % Royalty rate

• 3 Duration

• 4 Maximum Royalty amount cap

• 5 Currency

• 6 Royalty structure to comply with Indian taxation and its optimization

• 7 Payment terms, based on milestones like product launch or sales target accomplishment
  

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.

• 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/Vendors.

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

• 9 Automate Manual Processes