Cost Minimisation


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An overview of cost minimisation as financial strategy in business

Published in: Business, Education

Cost Minimisation

  1. 1. Cost Minimisation
  2. 2. Cost Minimisation Strategies Cost minimisation aims to achieve the most cost-effective way of delivering goods and services to the required level of quality
  3. 3. Benefits of effective cost minimisation
  4. 4. Two approaches to cost minimisation
  5. 5. Possible sources of cost reductions (1) <ul><li>Eliminating waste & avoiding duplication ( lean production ) </li></ul><ul><li>Simplifying processes and procedures </li></ul><ul><li>Outsourcing non-core activities (e.g. transaction processing, payroll, call handling) </li></ul><ul><li>Negotiating better pricing with suppliers </li></ul>
  6. 6. Possible sources of cost reductions (2) <ul><li>Pruning product ranges and customer accounts to eliminate unprofitable business </li></ul><ul><li>Using the most effective methods of training and recruitment </li></ul><ul><li>Introducing flexible working practices </li></ul><ul><li>Aggressive control of overheads (e.g. banning first/business class travel) </li></ul>
  7. 7. Potential problems with cost minimisation <ul><li>Business left with insufficient capacity to handle unexpected or short-term increases in demand </li></ul><ul><li>Cost reductions by one department may surprise and/or annoy other functions if they are not properly communicated and coordinated </li></ul>
  8. 8. Profit Centres A profit centre is a separately-identifiable part of a business for which it is possible to identify revenues and costs (i.e. calculate profit)
  9. 9. Examples of profit centres <ul><li>Individual shops in a retail chain </li></ul><ul><li>Local branches in a regional or nationwide distribution business </li></ul><ul><li>A geographical region – e.g. a country (for multinationals) or county </li></ul><ul><li>A team or individual (e.g. a sales team, a team of installers) </li></ul>
  10. 10. Benefits and drawbacks of profit centres Advantages Disadvantages Useful insights into where profit is earned within a complex business Can be time-consuming to both set-up and monitor Supports budgetary control at a detailed level, including setting profit objectives Difficulties in allocating costs (particularly) and revenues (occasionally) Can improve motivation of those responsible for the profit centre May lead to conflict and competition rather than cooperation within the business Comparisons can be made between similar profit centres (e.g. shops in a chain) Potentially de-motivating if profit centre targets are too tough, or if unfair cost allocations are made Improves decision-making at a local level (likely to be closer to customer needs) Profit centres may pursue their own objectives rather than those of the broader business Finance can be allocated more efficiently – where it makes the best return
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