Effective management of total costs should be a top priority for any company, whether during periods with recessionary pressures or during times of growth and prosperity. When facing a crisis, companies can face hard decisions about how to manage through an emergency and set up for recovery, and often have little time to consider choices and develop options. In the months following the Covid-19 pandemic, global interest rates have risen at an alarming rate in response to inflationary pressures – impacting such elements as:
- The ability to service debt.
- The ease of acquiring, operating, and maintaining assets.
- Access to stable and qualified labour.
- Other resources required to operate a business.
- A company’s free cash and access to working capital.
Inflation and Market Uncertainty
The Canadian monthly inflation rate peaked at 8.13% in June 2022 and has come down to 3.12% by October 2023 (ycharts.com, October 2023). In early October 2023, Bank of Canada Governor Nicolas Vincent noted the trend of businesses raising their pricing more frequently was likely contributing to higher-than-expected inflation and has the potential to drive a self-fulfilling prophecy of continued high inflation (CBC.ca, October 2023). The consequence – continued interest rate hikes by the Bank of Canada to combat inflation and drive towards a target of 2%. Current world events, the pandemic and recovery, and a period of heightened inflation and interest rates have influenced significant market disruption, which has impacted many businesses over the last few years.
The Relationship Between Costs And Solvency
How would you answer these questions?.
- What kind of business do you operate and how are your costs structured? Are they largely fixed, or do they fluctuate in response to your business activities?
- Do you feel your costs are high? How do they impact your cash outflows?
- What could you do if you had more free cash at the end of each month? How would you use it?
While these questions may seem elementary, they are (or should be) part of a fundamental practice for companies of all sizes and levels of maturity. Smaller organizations often struggle because they don’t have the size or clout to negotiate favorable terms on agreements, and many have leaders who have not yet faced cost management decisions and pressures. Large, established enterprises often struggle with cost management – due to inefficiencies that have built up over time and deeply rooted inertia that prevent any easy fix.
Cost Management and Competitive Advantage
Understanding and effectively managing costs can create significant competitive advantages for companies of all sizes. Companies might:
- Gain market share by offering their goods and services at a lower price than competitors.
- Improve profitability and free cash by retaining more margin on each sale, allowing for reinvestment in the business.
- Create the capacity for faster recovery from an emergent crisis.
Minimizing vs. Optimizing costs
While reducing costs may be advantageous for any business, we prefer a more nuanced optimization strategy rather than seeking the lowest cost position. Costs are required to generate value for a business and its customers. Driving out costs that lead to erosion of service or quality may impact growth potential, while optimizing a cost position for a given set of business requirements, risk appetite, and strategic goals may help a company to gain advantage.
Tactics for Cost Management
There are (cost effective) tactics any business can apply to better understand and reduce (or optimize) their costs. While not a complete list, these cost management tactics have proven to help organizations get a handle on their costs during times of crisis and improve profitability even during times of growth and stability. These tactics can be developed into programs, standard operating procedures, policies, and stand-alone projects without necessarily requiring expensive technology solutions.
Our advisors can help you develop a better understanding of your total costs, how to manage them, and how to drive your business towards a more competitive and sustainable future.