January 10, 2018

Cost Reduction: An Objective to Rationalise Company Resources

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Choosing to reduce company costs is like tackling the problem of water resources by deciding to keep the water that has already been gathered instead of scrambling to get more.

Cost and Revenue as Components of the Net Result

Cost and revenue are two factors that make up the net result, but they don't often get the same attention during cost management.

First of all, let's clarify the terms. When we talk about revenue, we are referring to the monetary value that companies receive from the end markets by the transfer of goods and the rendering of services, through a sales process. At the same time, we can define cost as the monetary value that companies transfer to the purveying markets, to procure the necessary factors of production for their transformation processes.

Thus, revenue is the monetary measure of the created value by selling goods and services, while cost is the monetary measure of the consumed value when using factors of production. The financial result, calculated as the difference between revenue and costs, is thus the increase in value created by companies, by carrying out exchange and transformation processes typical of every business.

 

Containing Gathered Water

When we concentrate on production costs we can think about the value that companies consume during their productive process, and then surrender to the suppliers that operate on the purveying markets.

A reduction in business costs means a lower consumption of value when using factors of production, and this in turn limits the transfer of wealth to third parties, when purchasing and using the production factors.

Cost reduction is thus fundamental because it allows the company to retain wealth that has already been created and is available in-house, a value that is present and that comes from the exchange processes that have previously taken place on the market.

 

Preserve Water or Look for New Sources?

If we consider business cost reduction as a path towards preserving the previously-gathered value, we shine a new light onto the topic. It's a kind of perspective that leads us to paying more attention to what we have already done and not only to looking for ways to create new wealth from revenue.

Instead, the predominant cost management models—at least in the Western culture—tend to favour maximising revenue rather than minimising costs.

This is why a company's success is often measured by its revenue, which is exactly the difference between the created wealth (revenue) and consumed wealth (costs). Based on this perspective, saving and rationalising means optimising the use of resources that are already present in the company, which, if used badly, are lost or wasted.

By Massimo Aielli, Research Director and Big Clients Manager

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