Cost Cutting to stick to your budget
Whether it is an individual or a large corporate entity or even the government, there are times when extravagance does hurt.
Boom times do facilitate a "feel good" and provides enough elbowroom to absorb the resultant pressures of profligacy. The budget becomes a mere formality of an exercise while a galloping top-line absorbs the shocks of excesses. But there are other times when incomes dry up, revenues reduce to a trickle, losses mount and survival is at stake. Tough times! These are the times when sheer desperation makes one open up to a host of otherwise unwelcome ideas - like belt tightening and cost cutting.
Why do we dislike cost cutting ?
Our fantasies are more about unlimited cash and plenty of opportunities to live out our wildest dreams. It could be some fancy gadgets, a dream vacation or whatever else our flights of fancy conjure.
Cost cutting, on the other hand, evokes a whole lot of negative imageries, of unfulfilled needs and sacrfices. Who wants to even think of it? At best, it merits a grudging acceptance, in trying times, when we are left without any other option!
Why is cost cutting important ?
1. The first obvious reason is to tackle desperate situations in abnormal times, when survival is at stake and there is no way to immediately increase income or revenues. If one has lost a job and has mounting medical expenses at the same time, the only solution would be a dose of belt tightening to tide over the situation.
2. Even in normal times, cost cutting is a very useful device for individuals to increase their savings and investment so that in the long run a more stable financial situation is assured. For corporates, cost cutting can improve efficiencies and competitiveness to ensure better returns to stakeholders and improve the financial worth for long term survival.
3. Cost cutting also introduces a discipline so that expenditures are looked at critically and the options weighed carefully before a decision is taken, thus avoiding the unproductive wastages of uncontrolled impulse buying and splurges.
4. Cost cutting would also result in a better standard of living, by ensuring a more efficient rational allocation of the available resources.
How does one cut costs ?
Approached in a sincere and systematic manner, cost cutting is a fairly simple exercise.
1. Study the pattern of expenses until now. If a record of expenses has been maintained, it will be very easy to classify the expenses under various heads for analysis. If a record was not maintained, try to build up one by referring to bank statements, credit card bills and adding the other fixed monthly payments - rent, utility payments etc..
2. Identify the unavoidable expenses or outgoes (mortgage payments, school fees, utility payments etc.,) and estimate the monthly payments on this count. When this is viewed vis-a-vis the monthly budget it will give a good idea of the surplus available for all the other avoidable expenses (entertainment, holidays etc.) .
3. Take a look at the avoidable expenses and figure out what needs to be trimmed to bring the overall expenses within the budget. This may be a difficult exercise calling for the involvement of the whole family so that decisions get implemented in true earnest.
4. Besides this exercise of identifying wasteful or avoidable expenditure as an immediate firefighting measure, it would be good to introduce a system of cost management on a permanent basis.
Ongoing cost management exercise
As an ongoing exercise, many ways and means can be identified to improve efficiencies and bring down costs, while maintaining or even improving the standard of living.
- Shifting from fluorescent lights to CFL or following a healthy practice of switching off lights while leaving the room can reduce electricity bills and this reduction over a period of time will mean substantial cost savings.
- If the phone bill is high, a study of the available tariff plans may reveal sufficient scope for reducing the bill by shifting to a different tariff plan or operator.
- Better travel planning can reduce the cost of air travel and also avoid needless hotel bills without affecting the business on hand.
- Online transactions often offer attractive discounts as well as opportunity to conduct a price comparison before deciding on the purchase.
- Repaying high cost loans (bearing high interest rates) will reduce interest costs (and also increase the disposable income on hand).
These are only illustrative and obviously, every individual will have to look at his own situation and identify the areas where costs need to be trimmed. With participation and contribution by all the family members, this can make a very meaningful difference to cost management and standard of living and make it possible to easily stick to the budget.
In the long run, cost cutting needn't be a restrictive trimming exercise, but can be an effective cost management exercise to continuously examine costs and avoid unproductive wasteful splurges and thus free up resources for meaningful productive investments and justifiable spending for a healthy lifestyle.