Cost reduction program
/What is a Cost Reduction Program?
A cost reduction program is a plan to cut expenses in order to improve profits or cash flows. When a cost reduction program is intended to counteract a short-term decline in operating results, it is more likely to be targeted at discretionary costs, which are those costs that do not have a short-term impact on company performance, such as maintenance and employee training costs. When the cost reduction program is instead intended to counteract a longer-term decline in results, the focus is on paring away products and programs that are less likely to generate profits or cash flows over the longer term. A cost reduction program may be combined with a strategic shift, where older product lines and programs are pared back in order to provide funding for the new direction of the business.
Strategic Cost Reduction
An argument can be made that a cost reduction program should always be in place, even for a growing business, to ensure that tight control is maintained over expenditures. By doing so, management assures that employees are constantly looking for the most efficient ways to conduct business. This behavior tends to enhance cash flows, which provides more cash that can be directed toward strategic initiatives. The end result should be a more competitive stance for the organization.