Money makes the world go around, and to the chagrin of some, there is no escaping it. This is particularly true for businesses.
And while most businesses have objectives of cutting costs in order to gain higher profit margins, it’s not always as straightforward as it seems. Without an ERP system in place, taking control of finances can be tricky.
In a time where consumers are becoming more aware of how they spend their money, organizations must also take into account how low supply and demand might affect long-term financial security.
Therefore, in order to stay in control of economic affairs, ERP systems, like NetSuite have become blessings with essential features that enable companies to pinpoint areas within their organization that are burning cash, where they can cut costs, and where they’re making money.
NetSuite can pinpoint sectors where cost savings would be beneficial in order to help companies thrive in domains that are suffering a loss.
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The Importance of Cost Savings
Cost savings is based on the actions that a company takes to reduce a company’s overall spend that in turn directly affects its profitability.
Cost savings is an important aspect of a company’s budget as it helps increase profits and improve cash flow.
While this is great for a company, the big question of why it’s important is another story.
When costs are reduced, the “extra cash” that would have otherwise been used elsewhere can be applied to the reinvestment of your business’s financial health and growth.
It is also a great way to free up time and resources that were otherwise weighing down your company’s bottom line, giving you the opportunity to focus on departments that require more attention.
Organizations that have the ability can take advantage of lowered expenses and open up savings accounts where they can have available funds for times of modest profits.
Cost Avoidance vs. Cost Savings
As more companies move towards cost-saving strategies and techniques, there are two that typically coincide with each other.
Cost savings and cost avoidance are different tactics that businesses use to cut costs where they can. Let’s compare both methods to see how their benefits can help businesses find cost saving ideas.
Cost Savings
Before determining if cost cutting is necessary, there are two types of costs that businesses need to consider.
Hard costs refer to tangible assets - machinery, facilities, equipment - that are easy to estimate when invoiced.
Soft costs are more difficult to quantify as they’re intangible assets that can’t be calculated on receipts or financial records. These types of costs are what lead businesses to focus on cost avoidance assessments.
Also known as cost reduction, cost savings are reflected on financial statements and focus more on tangible assets that decrease spending, expenses, and debt.
It’s recommended to add cost savings to financial reports year after year, as businesses will have access to business costs and whether or not efficiency and profitability have increased.
Contract renewals are a great way to save you money in the long run. When it comes to signing a deal for a product or service with your supplier, take the time to negotiate a reduced price for longer contracts.
Cost Avoidance
As its name suggests, cost avoidance is a measure businesses take to lower potential future business expenses and therefore avoid high costs.
Businesses who use legacy systems to manage operations and backend functions need to regularly spend money on the maintenance to keep machines and equipment from deteriorating.
Failure to keep up with repairs mean a hefty price tag down the line, or worse a complete replacement of machinery.
The idea of cost avoidance is not something tangible that you see in financial statements or monthly reports. It’s the preemptive action taken by a company to avoid increased costs in the future.
Software or technology are the most common choices when it comes to cost avoidance.
Mostly because of the fact that buying new technology - switching from a legacy system to an ERP software - eliminates the incurred costs associated with outdated technology.
In other words, making the choice to upgrade in the present means avoiding any future liabilities in the future.
Cost Savings Examples
When it comes to cost savings analysis, there are many cost cutting ideas for businesses.
Technology Partnership
Upgrading certain technologies to cloud-based systems cut out the middle-man and ensure cost savings across the organization.
NetSuite ERP has automatic updates twice a year, with maintenance and governance done by a NetSuite partner. While there’s a solid cost up front, rest assured you won’t have to constantly budget yearly maintenance and repair fees.
Contract Negotiation
As mentioned above, when renewing contracts for suppliers and vendors, negotiate pricing and cost for a value added service or longer contract dates.
Outsourcing
The expense for daily operations can be quite high, especially if you don’t require full-time employees for certain projects.
Outsourcing is a trend on the rise that helps businesses cut operational costs. You hire based on need. For example, if you’re launching your marketing department, perhaps you only need one blog written a week. Instead of hiring a full-time employee, you can hire a freelancer.
Outsourcing projects and people keep current full-time employees focused on their own projects, rather than spending time on other mundane tasks that decrease productivity.
Is Cost-Cutting Necessary?
For companies looking to cut down on expenses that have direct impact with profitability, cost savings is highly encouraged.
With cost avoidance strategies, like implementing a new ERP system, and yearly cost benefit analysis, companies can easily find areas to cut costs and grow their bottom line year after year.
NetSuite ERP solutions are accounting systems that are designed to keep a company’s money in place. It keeps track of incoming and outgoing financial transactions, controls cash flow, and helps businesses find areas that are excelling financially and others that could benefit from savings.
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