How to manage business costs and stay lean in the post-pandemic workplace

Pramod Dhalwani, CEO and Founder of IFC Group.

There are certain world events, which take place in humanity’s history, which shape it and alter it. The 2008-09 recession impacted the banking industry, resulting in Basel III being implemented. In the GCC, the bank credit policies were completely overhauled. With the current pandemic, business owners are operating in survival mode, while reviewing their cost base at a microscopic level. On the contrary and during a period of economic stability, business owners are usually more relaxed about costs and take actions as required for cost management rather than applying it as a business process.

This is different for start-ups and high growth companies, where the burn rate is an important metric to measure the sustainability and influence funding.

The Corporate Finance Institute defines calculating the Gross Burn Rate and Net Burn Rate as below

  • Gross Burn Rate equals cash divided by monthly operating expenses
  • Net Burn Rate equals cash divided by monthly operating losses

Cost is a large contributor to both metrics as cash is required to pay for expenses and if unchecked, can result in a business running out of cash. Investors and venture capitalists use burn rate as one of the key metrics in deciding the amount of funding to be provided.

According to CB Insights report published in 2019, 29% of start-ups fail due to running out of cash and 18% due to pricing or cost issues.

Managing cost is a process which business owners must implement throughout the business cycle. A simple acronym for this process, developed from my 28 years of research and practical application, is PAIR, also defined as Plan, Assign Accountability, Inspection Rhythm and Revise.

Plan

There are three types of costs that businesses incur:

Cost of sale, which are direct costs related to producing goods or service for sale. Managing this improves gross profit.

Opex, which are operational costs like rent, support staff etc. Managing this improves net profit.

Capex which are capital expenditure like purchase of machinery for production, IT equipment, etc. Managing this ensures a better ROI.

There are two ways of managing costs, planned and ad-hoc. The planned approach complexity depends on the size of business and can be created either on a spreadsheet or budgeting software. As an SME, the use of a spreadsheet is sufficient for the purpose.

Assign accountability

This is the execution step. Based on the experience of working with SMEs across the globe, many businesses create a plan that is filed away, rather than used as a reference point for accountability.

Every single line item in the planned expenditure, be it Capex or Opex, should be allocated to an individual with accountability defined. The metrics set should be based on the nature of the cost. For example, software subscription costs limit can be set per employee or company-wide depending on the type of business.

Inspection rhythm

A robust accounting process should be implemented to inspect and capture costs to provide accurate and timely data. This data should be available to the person accountable so that they can inspect it at any time to ensure compliance with the plan.

The costs within the business are interdependent, making it imperative for a collective inspection rhythm to ensure costs are on track. The impact in total of the variation needs to be reviewed to ensure that overall costs are also managed, not just the individual elements.

Adopting the lean mindset can generate significant savings by eliminating waste and thereby reduce costs. Every business from startup to large corporates have some form of wastage. If a certain manufacturing process does not have a zero-error rate, there are costs associated with reproducing or correcting the errors. By eliminating errors, business can manage and reduce cost. One of the recommended books for reading is 2 Second Lean: How to Grow People and Build a Fun Lean Culture by Paul Akers.

Revise

We live in a dynamic world where the speed of change is at an accelerated pace. This step allows the business owners to review their progress to date, re-validate the original assumption identified at the planning stage and then course correct, as necessary.

Firstly, identify the variances between actual and budget and then prepare a revised forecast. For example, forecasts prepared in May needs to include April actuals and estimates from May to December based on revised assumptions.

For successfully managing business costs to stay lean, it is recommended that every business owner, whether in crisis or not, execute the PAIR Methodology sequentially, whilst keeping the three ABCs in mind: Adopt a process-driven approach; build flexibility within the cost base and create a lean culture.

Pramod Dhalwani, CEO and Founder of IFC Group.
Pramod Dhalwani, CEO and Founder of IFC Group.

Key takeaways

  • Investors and venture capitalists use burn rate as one of the key metrics.
  • Managing cost is a process which business owners must implement throughout the business cycle.
  • A robust accounting process should be implemented to inspect and capture costs to provide accurate and timely data.
  • Adopt a process-driven approach; build flexibility within the cost base and create a lean culture.