By Doug Hudgeon
The Cost Reduction Tip
Effective management accounts are critical to a cost reduction initiative. Without it, your stakeholders can’t see that their pain is justified. It’s like the difference between running on a treadmill (without a watch or odometer) and running through the countryside. If you have a destination and can track your progress, your motivation will be higher.
Good management accounts are different from good financial accounting in that management accounts in a cost reduction initiative are concerned with real money out the door right now whereas financial accounts are often reporting on expenditure decisions made years ago (depreciation). I’ve prepared a sample data set that I’ll use for the upcoming series of posts.
The management accounts are from the fictional company ABC Services who provide software and consulting in the facilities management sector. They have one office in Sydney and another in Melbourne and the bulk of their revenue comes from the sale of asset management software but have an active consulting arm. They kicked off a cost management initiative in November 2010.
The management accounts tracks their expenses and revenue over the 12 months from July 2010 to June 2011. You can see from the orange line above that revenue has consistently increased throughout the year and from January 2011 their cost reduction program has made some headway.
Now let’s take a look at the impact of this on their profit: As you can see from the above chart, moderate to strong revenue growth combined with a high impact cost reduction initiative can create some stellar results.
In the next post, we’ll look at the data elements underlying the above charts and slice and dice the monthly data by location, division, expense type and headcount to see what areas of the company contributed most to this turnaround and which areas require further work.
Note that I’ll be changing the underlying data throughout the series of posts to highlight the importance of certain elements of the data set so don’t look for consistency across these posts. I’ll do a wrap up post at the end.
Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.