Many companies have a priority within Finance to have a high level of spend control with a focus on reducing costs. This in principle reduces costs within a business, which should in turn increase profits and help to improve the efficiency of departments. But are businesses sacrificing long term income for short term cost savings?
To start with, we have to consider that a department such as Marketing runs campaigns to improve a business’ reach and visibility to drive lead generation and improve awareness with the aim of this leading to sales. The department will operate within their budget and run as many effective campaigns as possible, whilst remaining within that budget. The paradox begins to develop when a budget is cut. The reduction in budget means a reduction in campaigns which leads to fewer leads and less potential for sales. However, from a Finance position, in the short term at least, a reduction in budget does help to improve profits and the impact of those cuts won’t be fully realised until they strike later on.
This where the fundamental problem lies, as Finance often takes time to see the effects of changes in budgets, especially if they don’t have real-time visibility and updates of income versus cost. A better way forward is not to look at the issue in such a limited way, but consider if cost savings do need to be made, then which areas are best to reduce in, and review the affect this has instantly rather than reviewing a month or two after the measures have been made. This helps to avoid damaging cost savings which can, in the long term, do more damage and cost more than they initially save.
Overall the importance of real-time analysis and adaption is fundamental to the success of a modern business. The need for spend control must not lead to a reduction in the overall profit of a company in the long term due to a reduction in income. Analysis of the cost savings versus the income lost by those savings should be done as the results of those changes come in and a change in strategy should be adopted as soon as a negative impact is seen within the business. The better and more up to date analysis you have, the easier it is to make those changes and have a beneficial cost management policy.