How Cost Reductions Help the Firm
A cost reduction as we have already defined it in a previous blog results in an improvement against budget. A plethora of cost reductions can result in a significant reduction in overhead, which is increases the margin of every product in the building. Cost reductions immediately affect the bottom line.
Cost reduction work has the added benefit of also getting our employees invested in their own company—they become partially responsible for the success of the firm. We suggest that any implemented cost reduction be rewarded with some small token and be celebrated publicly.
Profit improvements also affect margin, although sometimes only for this accounting period. No matter: we are still improving the situation of the firm and enhancing our ability to compete. If we have sufficient capital accumulation we do not need bankers’ covenants and other impedimenta of the financial world. We are not obligated to somebody who holds part of our destiny!
Publicly held firms can also distribute dividends, endearing themselves to investors. A solid debt to equity ratio implies substantial stability. And cash rules when the economy tanks like it did in 2007-2009.