With tough times set to continue for the foreseeable future, cashflow management is more important than ever. David Kendall FCCA offers tips for saving on procurement
This article was first published in the July/August 2020 International edition of Accounting and Business magazine.
Even as more countries begin to emerge from lockdown, there is no doubt that the general impact of the Covid-19 crisis on businesses continues to be very tough. Some will not survive, many will take on additional debt, and the fortunate few may flourish and prosper in this environment. For the vast majority, however, the focus will be to get on the road to recovery, reset, open their doors again, and retain their employees and the brands they have worked so hard to build.
For the majority of sectors it is likely to be a gradual process of restarting the engines and getting back up to speed. Sales revenue will be a difficult line to budget for until we have a clear vision of the landscape, until our customers and the general business environment stabilises, and until we can assess the impact on demand and supply chains in our markets.
What we can do right now though is manage our cashflow, the lifeblood of our business, and in particular invest some focus on our cost base. Now more than ever we need to control the costs and expenses leaving via the back door of our business, and manage the debts that we are accruing and our contingent liabilities.
Most companies of any size are quite astute at managing direct costs – raw materials, goods for resale and people. From a direct cost perspective there is unlikely to be anybody better positioned than you or your leadership teams to take the helm. It is the indirect costs, or ‘everything else’ in the profit and loss (P&L), that can often be overlooked, or not get the same strategic level of focus. Most businesses will have spends in 30 to 40 different categories of indirect expense, many of which will be nominal values. However, combined together they will have a material impact on your P&L, they will be of significant value, and they will have the ability to bleed your business of valuable cash if not controlled proactively.
When it comes to indirect costs there is nearly always room for improvement. In the UK, I have seen millions of pounds saved for FTSE 250 companies that have over 30 people in their procurement teams. To be brutally honest, the most common traits I see are complacency, naivety, over-protectiveness and arrogance. Indirect costs may have always been on the to-do list, but there was always something more pressing that took priority, and for that reason they were overlooked.
In the current market, the best approach from a cost perspective may not be on getting the best deal and making the most savings, but focusing more on supply chain delivery, plugging any unnecessary financial wastage, tapering down and adjusting cost profiles, and implementing contingency suppliers if incumbents cannot trade. You can then assess whether the costs can be adjusted or the terms improved or paused.
Time to take stock
From an indirect expense perspective there is no better time for a cost reset in your business. Now is an opportunity to embrace change and become more strategic, to draw a line in the sand and take stock.
Below is how I would recommend that you approach this process:
- Indirect costs. Prepare a supplier spend report and identify all indirect suppliers. Your procurement team may say that some supplier spends have been looked at recently, but look at them again – the devil is always in the detail.
- Supplier contracts. Assess where you are contractually for every single supplier. Do you have a contract? What are the terms and are they logged on the CRM system? What may be a nominal US$10,000 annual spend with a supplier could be a six-year and US$60,000-plus commitment.
- Saving opportunities in contracts. What is the basis of your contractual commitment and cover – is it volume related, and can it be adjusted, or can you work with your supplier to make the terms more flexible? Insurance and credit insurance come to mind here, as do energy costs and any take or pay clauses – are you liable for the energy you didn’t use while factories or premises have been closed?
- Authority. If you need to tighten your belt, should you adjust down your approval thresholds so that smaller spends require higher levels of seniority to authorise?
- Payment methods. Have you reviewed all standing orders and direct debits? Can you switch these to BACS payments?
- Cost conscious. Have you prioritised all of your indirect spends in order of how critical and important they are to your business? Not spending money in the first place is the best form of generating savings. In the same way that we clear out our wardrobes at home from time to time, we can adopt the same refreshing mindset with our P&L and budgets.
- Supplier contingency. For all critical indirect suppliers, do you have contingency suppliers in place? Carriage and logistics or food often come high up this list, but the same could be said for telecoms, IT, merchant cards, waste, cleaning, etc. What happens if those suppliers go out of business and what impact would that have?
- Brokers. For spends where you use a broker or a middle man, what value are they adding? Are there some nominal tail spends where they and their commissions could be cut out and you buy direct?
- Benchmarking against competition. What are your competitors doing? You may not want to engage third-party consultants to do the benchmarking, but there are other ways of researching the market. If you have shared suppliers, you could ask them. Do you have personal network connections who work in other businesses in your sector? Who are the main competitor suppliers for those goods or services? Get their views – you will at least build rapport and a communication line going forward.
- Quality. Are the products or services you use the best quality, most efficient, most durable, most ethical or sustainable? What are the new solutions coming into the marketplace? You may not want to move to a new supplier, but what else could your current supplier offer? Are they being as proactive as they could be?
- Do deals now. Certain markets are at the lowest price points seen in the last decade, be it due to wholesale pricing, low demand or high availability. Do you have awareness of the markets? Is there an opportunity to hedge a deal to secure future savings? Often a supplier will allow you to break a contract if the superseding contract extends the term and commitment.
If you are spending money that you don’t need to spend, you can become 100% more efficient in these cost areas. If a business spends US$10m per annum on indirect costs and averages just 10% reduced spend across all categories, then that’s a US$1m pure cash boost to net profits and valuable funds that can be used elsewhere to add genuine value to the business. Look at that in the context of your own business: if you have US$50m turnover and make US$3m profit, then that extra US$1m has just increased your profits by 33%. How many goods or services would you need to sell to generate US$1m profit?
I recommend you invest some time and resources into your indirect cost base and conduct a cost reset. You may well be pleasantly surprised by what you find.
David Kendall FCCA is a partner at Auditel UK.
"Most companies are astute at managing direct costs; indirect costs don’t get the same strategic level of focus"