While there are signs economic growth and corporate profits are improving, according to Treasury's Pre-election Economic and Fiscal Outlook (PEFO), companies continue to maintain a watching brief on expense management.
Treasury forecasts the Australian economy will grow by 2.5% per cent in the 2016/17 financial year and rise 3% in the 2017/18 financial year. According to AMP Capital, profits in the mining sector are expected to grow by between 16% and 17% for the first half of the 2016/2017 financial year.
Paula Kensington, CFO of global serviced office firm Regus, is concentrating on three areas of cost management in this economic environment.
“First, we're looking at consolidation across major expense items so we can leverage our buying power. We're also looking to control costs on purchases, which requires a review of authorities given at operational levels within the business and which items are authorised for purchase," she explains.
Ensuring sourcing inputs from low-cost providers is critical to the company, country of origin is Kensington's third area of focus. “It's important to know where your cost base is best delivered."
Says Kensington: “It's important to control your expenditure but balance this with the knowledge that you cannot 'save your way to success' alone."
This is especially the case, she says, when it comes to managing staff costs.
“Our main challenge is not cutting staff when the business does not have the proper support, systems and processes to sustain a reduced head count – important in the service industry," she explains.
Expense management is one of the finance function's main purposes, providing strict processes and controls for maintaining costs. But if costs increase dramatically, Sue Prestney, a partner in PwC's private clients team, says there are generally two variables that require attention: price and volume.
“Procurement concentrates on pricing and getting the lowest cost. The other side is waste. It's good to review waste on your key expense lines every two years. Staff will be able to identify waste in their own time, as well as in the way you use resources like power and even stationery and warehouse space. Focusing on waste is an excellent expense management tool," she explains.
Market forces make it more difficult to manage expenses, according to Prestney.
“This is an unpredictable year. For instance, there is uncertainty around the direction of interest rates in Australia and overseas. This requires optimum care about how you set your forecast and your budget," she says.
Prestney suggests using sensitivity analysis based on a range of interest rates and subsequent currency movements. “That's the best way to have some control. You can't control the operating environment, but you can understand the effects on the business as a result of different assumptions."
“The idea is to have a most likely forecast, a worst-case forecast and a best-case forecast, and have plans in place to deal with all of them. That's when you can really start feeling you've got some control," Prestney says.
“As CFO it's essential to be conservative when there is a big lag between when you start looking for work and when you get paid," Prestney says. “If you're doing your three-way forecast, in the worst case you've got to be conservative with the lag in getting work in the door. You really need to understand what your break-even condition is."
If a business is not expecting to book revenue for the immediate future, having enough resources to cover overheads might require negotiation with financial services partners to ensure they understand the business's cash flow cycle and are comfortable extending credit.
Sourcing low-cost inputs
Maintaining controls on procurement can be key in an uncertain economy to maintain competitiveness. While many businesses have looked to Asia for low-cost procurement, Prestney notes changes in the economic climate mean opportunities to source cheaper products are emerging in other markets.
“Bear in mind the big fall in the UK pound and the continuing low value of the euro. This has improved the relative buying power of Australian dollars against these currencies. So think about casting around the world for suppliers and comparing their terms to those offered by your traditional suppliers. The world is changing and it's time to have a broad look at procurement."
This involves undertaking a market review of your supply base, attending local and international trade shows and working with procurement consultants.
Says Prestney: “Give yourself time to do research, talk to people who might be able to help and don't just take the easy route and buy from where you bought from last year."
Her main message for CFOs this year is not to draw on what's happened previously to inform business decisions.
“Look at various scenarios for your cost drivers and what happens if those drivers move. Then take control and set your strategy. Don't accept last year's supplier will be this year's supplier. Everything has to come back to what is important to the customers. Never undermine your success factors and competitive advantages by always going with the cheapest option."
Similarly, Kensington's final advice to other CFOs is to work out what sets the business apart and spend appropriately to maintain its unique selling point.
“Controlling staff costs is important, but so is good customer service and delivery. Make sure you have robust processes and be very clear about exactly what you're buying."
- Use sensitivity analysis based on a range of variables to inform expense forecasting.
- Produce a most likely forecast, a worst-case forecast and a best-case forecast.
- Have plans in place to deal with all three scenarios.