CFOs are acutely aware about cutting costs, including contemplating layoffs, due to recent inflation challenges and a potential recession. While carefully managing spending is key to surviving a downturn, resorting to layoffs is never ideal as they come with long-term costs. Employee demand is currently so high that if you are forced to lay off employees, you will encounter challenges getting them back or finding quality replacements when you get back into growth mode. There are also negative impacts to staff who remain employed while others are laid off such as low morale, reduced loyalty, and deteriorating company culture.

To survive through a recession or downturn without layoffs, you need to find the funds somewhere, whether that is through generating more revenue or cutting costs. One of the easiest ways to optimize your costs is to gain visibility into your spending. In this post, we will cover the basics of cost containment and provide some ideas for maximizing the value of what you are spending during an economic downturn.

1. Follow the money to uncover inefficiencies and opportunities

Jet engines have computers on board that monitor every aspect of their performance. They are constantly transmitting data back to the manufacturer so they can identify anomalies, schedule preventative maintenance, and procure replacement parts with advanced lead times. Ideally, businesses should have the same visibility into their spending. You should be constantly analyzing where your money is going, figuring out where you can make small improvements, and measuring the results. Success is all about analyzing your data to see where the opportunities are and acting on them.

Through recent work with a small chain of regional retail stores, we discovered that over a twelve-month period they made over 2,250 trips for inventory transfer between stores — driving in excess of 75,000 miles. At a low estimate, it costs between $300 - $500 per transfer, which means over the course of a year, they spent over $1M on inventory transfers. While they will likely never be able to allocate their inventory perfectly, if they could reduce the volume of inventory transfers by 30%, they would be able to free up $300K+ of working capital they could then reinvest in the business.

Of course, the opportunity for you might not be in moving inventory — maybe it is in the amount of overtime you are paying, or in aggregate spending with vendors that you could analyze to re-negotiate a better deal. It is critical to conduct an analysis to understand where you are spending the most money and discover where the opportunities are.

2. Small savings add up

If you consider a $100M company that makes 10% in net profits, that means across the organization they are spending the greater part of $90M on operational expenses such as labor, materials, services, and fees. When you think about the volume of transactions that occur, even the smallest savings can add up significantly. High-volume transaction areas, such as your procure-to-pay process or your accounts payable (AP) process, provide some of the best opportunities for finding efficiencies.

Procure-to-pay

Every business has suppliers, whether you are a manufacturing company buying raw materials, a services firm hiring subcontractors, or purchasing office supplies. If you do not have technology or controls around the process, you will have people in different departments procuring goods and services — at best distracting them from their key responsibilities and at worst, duplicating services or paying more than necessary. You can streamline these efforts by switching to an integrated platform that automates your procure-to-pay process and provides visibility into spend across the organization at the functional level and supplier level, enabling strategic purchasing activities and the capture of cost savings via rebates, volume discounts, and prompt payment discounts. Some tools can even give you a more favorable “group rate” with common suppliers, since they negotiate on behalf of thousands of customers.

AP automation

Middle market companies process anywhere from hundreds to tens of thousands of invoices a month, depending on the complexity of their business. According to research by Ardent Partner, for average-performing teams, the cost to process each invoice is $17.61. At the high end, that could add up to hundreds of thousands of dollars each year. And it makes sense — manually processing invoices eats up a lot of staff hours. You have to open the mail, enter data into a system, and then send a physical check or digital payment. Using software that intelligently automates the process by “reading” digital invoices and processing them automatically can drastically reduce the number of hours staff have to spend processing invoices. Top-performing teams can get their costs down to just $2.42 per invoice.

3. Forecast demand and plan capacity effectively

In addition to saving costs on repetitive tasks, you should also focus on your utilization optimization to save costs. This means having the right resources, skill sets, and tools (and deploying them appropriately) to achieve the maximum output for clients. You can do this by breaking down the traditional silos between finance and other departments and leveraging financial analysts to support operational analysis — often referred to as “xP&A” (like FP&A, but where the x stands for all other departments beyond finance).

In manufacturing, you need to have good demand planning capabilities or use some kind of manufacturer resource planning (MRP) tool, which is a subset of enterprise resource planning (ERP) software. These kinds of tools will calculate the amount of raw materials you need, when you need them by, and produce a production schedule based on customer orders and your process. A lot of older ERP systems have clunky planning engines and complex setups which results in companies doing a lot of their planning offline in spreadsheets. If you are struggling with your current systems, look into upgrading your tech. With the right systems, you should be able to achieve cost containment and savings.

Similarly in professional services, you also need to be able to draw the link between demand for resources and utilization. Using a professional services automation (PSA) solution allows you to automate your capacity planning. This allows you to easily see how busy your team members currently are and understand what your resourcing needs will be going forward. By automating this process, you can become much more efficient in allocating work, ensuring that no one is under- or over-utilized.

4. Make the most of your resources

A final way to help reduce your costs is to make the most out of your existing resources. When we are talking about “resources,” we are referring to labor but also fixed assets. Let’s see how you can ensure you are getting the best use out of both.

Labor

It is important to consider whether you are getting the best use out of your human resources, This will not only save money but will also help retain staff who want to feel engaged in their work (which is especially critical in today’s difficult labor market). Consider whether you are giving your best to your employees and getting the most from them in return. Do you have a full understanding of their daily challenges and stressors? Do you they have a clear understanding of company strategy and they role they play in it? Are there repetitive tasks you could automate to free them up to do higher-order projects?

For manufacturers, you also need to consider what labor is being consumed in your manufacturing process versus what should be consumed. Look at how much overtime you are paying — this can be a huge cost to manufacturers. A material requirements planning (MRP) platform can help with ensuring you have the right amount of labor to meet demand and spare you from paying too much overtime.

Assets

Your assets could include any facilities or special tools that you need for value generation in your business. For instance, fixed assets in construction would include heavy equipment such as an excavator. The high cost of such equipment — whether you own it outright or have a loan — means that you are tying up hundreds of thousands of dollars you could otherwise by investing in your business. To get the most of that investment, you want to make sure it is going out to job sites and returning value, not just sitting around sucking up funds.

For your business, it might not be an excavator, but the same principle applies. You want to maximize the productivity of your assets, whether they are people (professional services), heavy equipment (construction) or machinery (manufacturing). It is also about minimizing the downtime of these assets through preventative maintenance, mitigating burnout risk, and/or making strategic upgrades.

It is important to understand your utilization of the resource, but it is also important to understand what costs are involved in using it, as higher costs dilute the total revenue generated. Ultimately, you can create value by generating additional revenue through use of these assets and driving additional value through cost savings as you reduce the administrative costs of the assets sitting idle.

You have to spend money to save money

Often finance teams do not have the bandwidth to sufficiently analyze where money is going and take action to optimize it. But as we have written before, not investing in your finance function also has costs. You can unlock huge cost savings that will more than pay for themselves by conducting cost analysis.

However, financial data analysis is a very particular skill. If you already have this talent in-house already, it is worth considering how you can free up this person from other tasks so they can conduct cost analysis. If your team does not yet have the skill set, you can build it in-house by providing training opportunities. You can also outsource this function, an investment that many mid-market companies find well worth it. By partnering with a finance consultancy or a professional services firm like Citrin Cooperman, you can enlist a fractional analyst who can help you analyze your spending and identify opportunities. This arrangement gives you access to the expertise you need only for the hours you need it, meaning you do not have to shell out for a full-time role.

At the end of the day, it is an investment to manage your costs, but the results are well worth it. When all of your competitors are experiencing layoffs, you will not have to — and you will emerge from a recession or downturn stronger, more capable, and more resilient than before.