Cost Analysis and Finding Waste

The best advice a client ever gave me was, “You got to hunt where the deer are,” by which he meant you have to focus effort where the payoff is greatest. Establishing cost targets for overhead and cost of goods sold provides the turnaround team with clear goals and provides the turnaround committee with a tool for measuring progress. Goals also help staff and management come to grips with the painful change necessary to improve performance. Three techniques cost analysis techniques are (i) payment analysis, (ii) functional analysis and (iii) audit programs. Payment analysis begins by ranking expenditures by vendor which automatically prioritizes high payoff vendors. Functional analysis examines the cost components of each function for high payoff targets. Audit programs systematically step through income statement and balance sheet accounts looking for savings. Targets of opportunity are areas in which substantial savings have been found in many companies. Among the most fertile areas for cost reduction are facilities, vehicles, insurance and telecommunications.