How to rationalize and guarantee perpetuity in the reduction of SG&A expenses
The direct costs, linked to Core business of the companies, are always under the spotlight, being very well controlled and undergoing constant revisions, as they have a direct impact on the product offered. The other expenses, on the other hand, because they are not so palpable and explicit, end up being like a drain, leaking out little by little, without being noticed, resulting in a company with low profitability.
An example of those items that can impact a company's financial results are SG&A (Sales, General & Administrative) expenses. These expenses are related to the administration of the company, including salaries, fees, travel and other expenses in areas such as Commercial, Marketing, HR, IT, Finance, Accounting, etc.
The reduction of this type of expense combined with the implementation of a more efficient management of budget performance can substantially increase the quality of the financial results obtained by an organization. However, for the rationalization of SG&A expenses to take place in a healthy way - that is, without affecting sales and services to business areas - there are basically three main steps:
Identifying the potential to reduce expenses
Once the need to reduce SG&A expenses has been defined, it is necessary to carry out a Assessment of the company's main accounts. The accounts can be grouped into packages, according to their profile, to facilitate the impact analysis of each one and assess the effort to reduce them.
Learn more: How to group a company's accounts
A package is a grouping of similar accounting accounts that allows the specialization of your manager, making monitoring more effective.
Example of accounting accounts within the Personal package
After grouping accounts, it is important to prioritize the packages with the greatest reduction potential. To this end, we can consider the total value of the package, recent significant increases and its historical variability. Accounts with higher amounts, recent increases, and greater variabilities are the main candidates for deeper analysis and direct action, ensuring the real impact of the review of these expenses on the company's total expenses.
Evaluating expense reduction actions
With the visibility of which accounts have the greatest potential for reduction, the next step is to carry out Benchmarks internal and external, comparing productivity and cost indicators. In this comparison, it is worth highlighting factors such as location, scale, and business segment, as well as other peculiarities that may distort the analyses. Thus, it becomes possible to assess the efficiency of each area and of the company in the use of its resources.
Based on the comparisons of the accounts, a survey of hypotheses is made, which helps in solving problems. The hypotheses are tested and, with validation, the risks associated with them and the ways to mitigate them are evaluated. Thus, it is possible to propose improvement actions and measure the expected gains with them. These actions may be aimed at improving processes, implementing new technologies, and organizational restructuring. Actions must be prioritized, considering greater gains and lower complexity/implementation costs.
How to perpetuate the reduction in SG&A expenses?
The implementation of actions, like any organizational change, must pay attention to the necessary change management aspects, in order to guarantee their effectiveness. All competent areas of the company must be accessed, such as supplies to replace suppliers, legal to renegotiate contracts, HR to promote staff adjustments, etc.
In addition to acting at the outset bringing the actions that will enhance the gain, the administrative areas must be monitored through indicators that reflect the impact of these actions over time. This management by indicators allows the effect of cost-reduction actions to be captured not only in the short but also in the long term.
Streamlining expenses with SG&A means spending less, but it doesn't necessarily mean doing less. For this, planning and control are very important, but there is an equally or more important factor: company culture. The company's constant focus on reducing expenses, reflected in the individual attitude, is an important tool for rationalization. In addition to these aspects, an efficient budget management process and the creation of individual incentive mechanisms play an important role in reducing the level of expenses. In this sense, the OBZ (Zero Base Budget) can be highlighted as a very efficient methodology for preparing the budget, also contributing to the reduction of expenses.
About the author
Fabiano Muniz he is a Visagio partner and leads organizational transformation, operational optimization, performance management, zero-based budgeting and cost reduction projects (having worked in the retail, financial market, telecommunications, agro-industry and automotive industries). He is one of the partners responsible for the financial practices, budget management and cost reduction in Visagio projects.
