CONTROLLING COST IN TIME OF COVID-19

SYNOPSIS: Abnormal Circumstances like natural calamity, epidemic situation warrants organizations to take countermeasures like resorting to cost accounting techniques, Zero-based budgeting, innovation in production planning to remain afloat. This article discusses methodologies that may be adopted to overcome challenging period.

The ongoing COVID-19 pandemic situation has been a challenging time for the companies and their employees. During this global pandemic, the greatest concern of the companies has been to understand the risks to their businesses and control the dramatic revenue loss.

Most of the companies are experiencing a significant revenue loss.

Realizing the potential magnitude of the pandemic, most management of companies have reacted rapidly by taking various countermeasures for maintaining short term liquidity of the company like by resorting to a reduction in overheads including rationalizing workforce temporarily or permanently.

Knee jerk reactions towards challenges thrown by natural calamities may provide some short term ease but in the long term, it may turn out to be counterproductive & may result in new challenges like loss of trained manpower, employee morale & motivation, therefore structural and sustainable measures are required to overcome the economic challenges, maintaining solvency when sales are declining, various tools of cost accounting can help companies stay afloat in such economy meltdown.

The financial crisis of 2008-09 has shown that the companies implementing cost controlling programs have emerged as strong and profitable.

#Human Resource Management:- Manufacturing companies normally keep floating manpower to adjust to the level of economic activity while retaining the skilled permanent manpower. During periods of natural calamities like COVID 19 which affects not only whole nation but also the global economy, managing spending on human resource need to be managed. Temporary reduction in salaries & perquisites like transport allowances, leave travel allowances based on salary structures of the company, setting off lockdown days against paid leaves of the employees which not only cost of leave encashment but also ensure availability of employees when economic activities restart or look upwards. Management should lead by example by resorting to voluntary cuts before asking employees to express their solidarity.

#Eliminate Non-Essential Spending: –There is always room for improvement when it comes to expenses/overheads. An effective way of reducing cost is analyzing all expenses using ABC analysis and challenging all expenses on the principle of Zero-based budgeting.

#Identify & implement cost-effective processes: – Identify the cost incurrence which can be reduced/eliminated by an alternate way of performing activities. For example, consider video conferencing instead of travel by executives, planning effective travel by availing apex fares, reduction in travel entitlements like five-star to three-star accommodations, economy class instead of business class, lowering car entitlement for local travel etc.

Adoption of work from home culture depending upon nature of business processes which can reduce the payment of conveyance/transport allowance of staffs working from home. This way companies can save cost on energy, utility and other related costs.

Company may reduce number of shifts, number of days of production as per supply which not only reduces the cost of operations but at the same time productivity levels are not compromised. The related overheads like transportation, canteen expenses etc. also get reduced.

#Develop the in-house competencies: – Companies outsource lots of routine work to outside agencies to help Finance/HR/Legal managers to manage the statutory compliance & documentation, repairs & maintenance work etc. Companies can promote in house competence for replacing outside agencies for reducing cost.

#Reduce Procurement Cost: – Procurement cost form a major part of the manufacturing industry. Procurement Cost comprises the purchase price, import duties, transport, handling, and other costs directly attributable to the purchase of goods and services. The calamity like COVID 19 is changing the way companies do business. This is an opportunity to modernize procedures and to adopt “new normal” by adopting the digital transformation. Digital transformation can help reduce procurement costs through improved vendor selection and negotiating tactics. The procurement team must have a good understanding of all the components of product and services they intend to procure from the vendors. There are often opportunities to remove non-value-add components of a product or service. It happens when buyer and supplier have a different perspective on the value of product or service. The procurement staffs should negotiate with the vendor for supplying customized product or service at a reduced cost as per the organization's requirement instead of the standard supply of vendors.

Further, all the purchases of Goods and Services comprise Goods & Service Tax (GST) which is subsequently recoverable by the entities from the taxing authorities on completion of compliance. Businesses need to be more active in regular Input Tax Credit (ITC) reconciliation to take advantage of ITC and control ITC leakage for better working capital. The ITC which is not received in GSTR 2B will be a waste for the business instead of working capital.

#Reduce the Cost of Contracts: – As this global pandemic impacts many industries, this may be a good time to renegotiate reduced fees or better pricing with multiple suppliers and contractors or chose new contractors that provide the best value for money.

The procurement team must work closely with contractors while preparing contracts and focus on the desired outcome otherwise it can lead to inadequate results. For example, contractors may be paid, instead of the number of hours of service provided (Input KPI), per ton service (output KPI).

#Inventory Management: – Companies may relook their inventory management by adjusting maximum & minimum levels, resorting to Just in time inventory techniques & soon.

# Diversification to utilize surplus capacities: – Calamity pandemic like COVID-19 enforced a total or partial lockdown around the country which reduced demand for many products but at the same time resulted in demands for new products such as ventilators, personal protective equipment, Oxy-meters, gloves, face shields, masks, and sanitisers etc. Some of the manufacturing companies such as Ford, Toyota and Tesla turn their production system for the manufacturing of ventilators. The apparel industry quickly adjusted its manufacturing to produce personal protective equipment, gloves & masks.

Following are some of the leading manufacturing companies before and during COVID-19 

Source: World Economic Forum, 2020

Conclusion

Companies will require formulating a structured policy to mitigate the impact of calamity/pandemic by focusing on cost & management accounting for cost-effectiveness by immediately constituting the  Cross-Functional Team for ensuring optimal use of resources, digitization and quickly resorting to the diversification of products which the company can produce economically without much investment.

Authors

Thank You

CKC LLP

The information provided in this article does not, and is not intended to, constitute legal or financial advice.

The Authors are partners in CKC LLP. CKC LLP is a firm of Cost & Management Accountants and has supported domestic and international clients in generating more than 500 million in annual savings via strategic cost controlling advice across multiple industries.

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