Monitoring efforts at cost reduction will ensure their effectiveness as well as maintain focus on this important issue. Widening profit margins increases profitability and contributes to long term success. Often the demands of day to day business operations take up practically all of a person’s time but cost reduction and process improvement result in more available time. So finding the time to work on cost management is time well spent. The following areas should be evaluated on an ongoing basis:
Evaluate Marketing Costs – Know your customer retention rate and the amount of money spent on retaining existing customers. Knowing the retention cost per customer will contribute to setting prices and developing operating plans. Just as important is the cost of customer acquisition. Taking the dollars spent on advertising for new customers and dividing it by the number of new customers earned within a given time period will determine the cost of acquiring a new customer.
Grade Sales Efficiency – Sales costs are largely influenced by the effectiveness of business support processes. Efficient sales support processes equate to more sales volume. Any areas that require a front line employee to look for needed information can impact the sales process. The ratio of areas that are supported divided by the total number of areas affecting customer interaction will give the sales efficiency ratio.
Improve Shop Proficiency – Increasing the utilization of available labor hours results in higher sales volume and greater overhead absorption. Identifying and correcting factors that negatively impact shop proficiency will improve sales and profits.
Measure the Impact of Shop Management Systems on Costs – There are a number of areas that a shop management system can impact operating costs. The ratio of the number of areas positively impacted by systems to the total potential areas will give the system effectiveness ratio.
Evaluate True Purchasing and Inventory Costs – Check each opportunity to lower costs in this area and determine how many are being taken advantage of.