How to get effective cost reduction right

12 April 2024 / Insight posted in Article

In the second article of our ‘Seven ways to respond to a change in financial circumstances’ series, we look at reducing costs – an area that is not as simple as it might first appear.

Given the current financial climate, it is likely that many nonprofits have already tried to reduce costs where they can be easily saved. This means that any further cost reductions will have more profound consequences. This could be the reduction or closure of a service, downsizing your building(s), or a reduction in marketing or other business development spend. But do you have sufficient data to make an informed and strategic decision?

It is important that charitable organisations create and show the impact against their spend. Making a strategic decision about a service reduction or closure requires you to have a good grasp of your expenditure and how much it really costs to run your different services. Added to this, do you know how much impact your services really create? Answering this question is an involved and complex process but doing so is vital to strategically assessing your services. Knowing both the financial viability of your services and how impactful they are enables you to then plot them on the 2×2 grid below.

Impact vs Profitabilty chart for nonprofit advisory

The grid is clear; if any of your activities lie in the bottom left quadrant, then why are you doing them? If you are looking to reduce your costs, then the bottom left quadrant is the place to do it. This grid is also a valuable tool when looking at ways that you might re-imagine your services to move them further up towards the top-right of the grid, but that is a topic for another article.

If you are looking to reduce costs elsewhere, then be clear as to the consequences of any cost reduction decisions. Reducing marketing spend might be an easy short-term win, but marketing will be how many of your service users find out about and access your services, leading to future income reductions.

Fundraising spend is another area considered for cost reduction. But this will almost certainly result in a reduction in your future fundraising income. Scenario-planning the effects of cost reduction is critical to the long-term success of any cost reduction exercise.

We have seen many organisations over the years that have attempted to reduce costs by small increments. In my experience, this does not work but instead leads to death by a thousand cuts. Staff morale plumets as they wait for the next cost cut to happen, wondering if this time their job will be on the line.

If you are going to reduce costs, be clear about how much you need to save and strategic in where that saving is to be made (including using the 2×2 grid above) – and don’t ignore the data. Plan and fully cost the likely consequences to make sure the cuts will work. Then cut once and make sure that you cut deep enough.

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Contact our Nonprofit Advisory team for more information on ways your nonprofit organisation or charity can effectively reduce costs.

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