How Will I reduce Costs and Expenses? Summary


  • Over time as your business becomes established, you start expanding into new products, services and possibly new markets
  • Refocusing is often the trigger for renewal
  • Refocusing the company is about becoming more profitable by managing for greater efficiency (reducing costs and expenses)

Measuring Efficiency:

  • Ratio Analysis:

    • Return on Sales = Net Profit / Sales
    • Return on Assets = Net Profit / Total Assets
    • Inventory Turnover = Cost of Good Sold / Average Inventory.
    • Collection Period = Accounts Receivable / Average sales per day
    • Gross Margin = Gross Profit / Sales


  • Often companies enter phases of contracting and this leads to greater field and refocusing on their core business
  • Core Business: The combination of products and services and the market segments that produce most of ta particular company’s profits
  • Concentrate on the product/services that have proven most profitable


  • Any task that you perform over and over in your business is an opportunity for maximizing efficiency. 
    • Tasks must involve the least possible time and effort. 
    • Use the best tools, methods, and even the best paperwork for the job.
    • Forms and Templates:
      • Standard document templates include proposals, contracts, letter templates, invoices, work orders, checklists, etc.
    • Employee Handbooks and Operations Manuals:
      • Handbooks can be training tools as well as part of the contract with an employee. They can include:
        • Company history and mission 
        • Employee benefits
        • Behavior and dress codes
        • Probation periods and policies 
        • Termination policies
        • Work and vacation scheduling
        • Pay schedules
      • Operations Manuals are written for those who perform the duties of the business. Policies and procedures for significant functioning areas are covered, including:
        • Organization structure and job descriptions
        • Accounting systems and procedures
        • Purchasing and inventory control
        • Production methods and procedures
        • Customer service procedures and policies
        • Promotion methods and policies
        • Engineering or design process
        • Any significant activity for the particular business


    • Work Design:
      • Work design: The process of finding the most efficient methods and procedures for doing particular jobs.
      • Time and Motion Studies: Research to determine the most efficient way to perform particular jobs.
      • Job Standard: A statement of the quality and quantity of work that can reasonably be expected from an employee performing a particular job. 


  • The redesign and integration of repetitive tasks can be carried out by mechanical and computerized equipment. 
    • Robotics: The use of automatic computerized mechanisms to carry out tasks previously performed by human labor. 

E-business Tools:

  • The use of any computerized and web-based technologies to assist the functioning of a business. 
    • Marketing research
    • Promotion
    • Distribution
    • Finance


  • Two axioms of business
  1. Most of the profit made by most companies comes from repeat customer purchases
  2. It is cheaper to keep an existing customer than it is to get a new one. 
    • Customer retention: Maintaining the loyalty of existing customers for repeat sales. 
      • But, beware of risking your customer relationships in the name of efficiency. 

Managing Customer Relations:

  • Customer Relationship Management (CRM): Customer relationship management is a marketing information technology strategy (a software package) that monitors customers and classifies them into different categories, giving special treatment to those groups of customers that provide the most profit. 

Service Marketing:

  • Pure services: Businesses offering no, or insignificant, physical product. In pure services:
    • Price differentiation is difficult to justify.
    • The customer may participate in the creation of the “product.” 
    • Evaluation of the service quality may be difficult.
  • Services marketing: An area of business study that examines the non-product elements of keeping customers satisfied. 
    • Much of the understanding of customer satisfaction comes from the examination of customer dissatisfaction. Studies of dissatisfied customers provide evidence that:
      • The vast majority of unhappy customers do not complain to the service provider.
      • The average disgruntled customer tells around ten people of the problem.
      • The majority of dissatisfied customers who do complain are likely to be retained as customers if their complaint is resolved. 
  • Customer retention depends on actively eliciting feedback about satisfaction.
  • One of the most significant areas of customer dissatisfaction is wait times. 
    • The wait feels longer when:
      • Of unknown duration
      • Unoccupied – provide reading material 
      • Pre-process – have customers fill out a questionnaire so they think the service process has begun
      • Unexplained – provide reassigns for delay
      • Unfair – apologize when it’s your fault
  • Satisfying the Difficult Customer:
    • See Figure 10.1 (page 236) for types, characteristics, and approach


  • Hiring the Right Staff
    • Recruiting:
      • Walk-ins
      • Employee referral
      • Job match
      • Employment agencies
      • Professional recruiters
      • Educational institutions
    • Selection:
      • Screening form the application
      • Initial interview
      • Testing
      • In-depth interview
      • Reference/background
      • Final selection
    • Staff Training:
      • On-the-job training: Where employees learn by observation and by trial and error, usually working with someone who is already competent in a particular job.
        • Many business owners believe it is cheaper to find people trained by another company and then lure them away with higher pay.
        • Most successful companies tend to do more training than average, as well as play competitively. 
    • Organizational Development:
      • Morale: The feeling of relative enthusiasm for the business collectively held by the employees.
      • Leadership Program: A formal, organization-wide system to improve morale and involve employees in the decision-making process. 
      • Succession Planning: The identification and grooming of specific employees for future promotion to particular areas in the organization.
      • Mentoring: An employee development technique that matches the employee with a senior manager (not necessarily in the same department) who functions as an adviser for the employee. 
      • Job Shadowing: An employee development technique that allows employees to observe or assist managers in their jobs. 


  • Costing Systems:
    • Direct Materials
    • Direct Labour
    • Overhead
  • Cost-Based Pricing: You must make a profit. But, the overall pricing strategy should always be more of a marketing issue than a costing problem. It should be related to your company image and marketing conditions. 
    • Activity-based costing: A method of apportioning overhead to a job by breaking the job down into detailed activities, each of which has a specific overhead cost. 
  • Make or Buy Decisions: 
    • Advantages of Making:
      • Direct control of quality
      • Direct control of delivery
      • A guaranteed source of supply
    • Advantages of Buying:
      • No investment in equipment
      • Greater specialization in business
      • Easier to redesign product (not limited by own equipment)
    • Outsourcing: The buying of products or services from outside a company, instead of producing them in-house, mainly when producing them yourself is a feasible option or past practice. 
  • Budget for Efficiency:
    • You have to spend money to make money.
    • Money is limited. Calculate the costs for any particular efficiency project being considered. 
  • Project Budgeting:
    • Identify the costs for any efficiency project.
    • Estimate the annual savings that would result from the particular efficiency measures. 
  • Return on Investment (ROI) Analysis:
    • For each proposed efficiency program, calculate the estimated ROI:
      • Project ROI = Estimated annual savings / estimated implementation costs.


ARBUS FINAL at the University of Waterloo – StudyBlue.

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