Five Step Process to identify broad saving potential in an organisation

Hi Folks,

Many of us work upon looking at the performance of company by analysing their balance sheet and P&L statement but when a management consultant looks at an organisation, he additionally looks at cost saving opportunities as well. Here i am going to easy five steps which needs to be followed for identifying the cost saving potential

Step 1: Get the Trial Balance of the company/Organisation. Trial balance will contain details of all the expenses against each header incurred during the FY

Step 2: Analyse expenditure % for each broad header in Trial Balance. This will provide an overview/idea on distribution of expenditure. This will also indicate which area needs focus and which cannot be touched. Example: % Expenditure of Raw Material cost, Manpower Cost, Indirect expense etc.

Step 3: Benchmarking expenditure as % of revenue with peers or past performances. Another crucial step here is benchmarking. In order to identify the scope of improvement, it is essential to compare the performance. This can be external (if we have competitors data) or internal (by looking at year on year increase) 

Step 4: Second level analysis for major spend area. After major spend area is identified, next step is to look at the next level details of expenditure which would give you an idea of major contributor in the expenditure. Example: If Raw Material is major spend area then we can go to bifurcation of expenditure to identify which raw material is contributing maximum etc. 

Step 5: Quantifying Improvement %. After we are in depth of expenditure, last stage is to quantify improvement scope. This is done after we reach to detailed breakup and at KPI which we can improve. There we can compare year on year trend and can use quartile to quantify the scope. If there is KPI which needs to be reduced, we take 1st  Quartile(average of lowest 25%) and for increasing we take 3rd Quartile (average of highest 25%).  This would give you an idea of what% of improvement we can plan to get.