BusinessCompany NewsInsider Business: Touch base

Insider Business: Touch base

Our experts discuss the need to have a firm grasp of your cost base

Is it the cost base that’s really important?

Eric Tracey, senior independent director and chairman, audit
committee, at Chloride Group

The main problem in the current environment is that you don’t necessarily
know how secure your revenue streams are. As soon as your revenue base starts to
fall, if you are going to maintain your margins you have got to control your
cost base.

It’s essential to understand the drivers of your revenue streams so that you
get a handle on what might happen to your revenues in the next year under
various scenarios.

When I was a finance director at Amey, it wasn’t so much the cost base as
controlling cash that was really the issue. Not understanding your cost base is
serious but not knowing exactly where the cash is coming from or where it might
be going to or when it might be going, is a greater concern. The key always
comes back to the alignment of the management of the organisation and control of
cost with the strategy and business.

The nearer you are to the edge of the financial cliff the tougher you have to
be because you have other stakeholders being hard on you. It is about survival.

When you can compare that with last month and what other businesses are doing
and you have an understanding of the context, then you are in with a chance.

Are costs cut to reduce spending or for other reasons?

James Fillingham, partner at PricewaterhouseCoopers

People go after buckets of opportunity and the easiest buckets are the ones
that you control with your cheque book and the ones that are most visible. So
that is where people start. They don’t necessarily make the link between what
are you spending here and how does it support that.

We are all preoccupied with the downturn, but in the not too distant future
we’ll hit the bottom. You need to be ready for when it picks up. How do you
spend money to drive value and drive revenue?

Most of the people out there have not got rolling cash flows, they don’t know
how much they have the next week and the week after. Profit is just a proxy for
generating cash that we can dish out to stakeholders.

The finance guys need to develop more backbone, go out and do the job and
really challenge. It’s about good housekeeping.

Now it’s easier to make some of the decisions which were just too difficult a
year ago. That might not just be about cutting costs but also driving
efficiencies and making tough decisions in your business. If you can’t do it
now, when are you going to do it?

Can software help you control the cost base?

Mark Wilkinson, vice president, EPM & BI ­ UK, Ireland Israel
& MEA at Oracle

Many of our customers have done a lot of work around regulatory issues that
have been imposed on business in the last five years. What we are seeing is
generally a lack of investment around tools that can provide more forward
looking information to help businesses make more insightful decisions
particularly on the subject of managing costs.

Businesses make steps by department or by division rather than across the
enterprise. Aligning your business and decisions around costs and revenues and
the allocations against certain products and services is a vital part of making
correct decisions in hard times.

There is a lot of focus on reporting rather than scenario planning. Most
people have a pretty good handle on the overall cost base. It is more about what
they can they do more to understand the future of their business and how to move
We see FDs becoming far more business partners than score keepers. If they’re
providing the business with good information that is insightful then there is no
reason why they shouldn’t be more firm about their view of how the business
strategy should move forward.

What attitude should FDs bring to managing the cost base?

James Rowlands, finance director at Liken Group

It’s important to look at what a business was doing during the growth period.
The chances are that is where the mistakes and the overspend lies but the lack
of efficiency has evolved.Make sure you are not operating a policy of cutting
cost without aligning that with your revenue ambitions and what’s happening in
the market. Just looking at costs in isolation could be a fatal mistake.

With the businesses that I’m involved in as an FD, there are areas where I
can understand the cost but not understand whether or not we are missing the
opportunity costs there. In other words the cost maybe being captured but
understanding the cost base rather than just reporting it is a very different

It’s a time for FDs to be inquisitive and to understand all aspects of the
business ­ but it is also critical not to be aggressive about that in the
current climate. You don’t want other aspects of the business hiding, ring
fencing or not being completely open with you. It is best done as part of a

The key is to make sure that decisions are based on good information
otherwise the opportunity is a wasted. Everyone wants to come out the other side
of a difficult period, leaner, fitter, and to do that you have got to make the
right decisions.

Chaired by Gavin Hinks

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