From the financial perspective, there are two types of cost that management has to deal with – variable and fixed costs. The variable costs are those incurred in relation to the revenue or sales movement. Variable costs tend to be higher when sales increases, for example in a retail business, people costs such as salary and employee benefits can be increased due to adding of new sales people to support sales growth from new store opening. On the other hand, when sales drop from non-performing store closure, people cost may drop accordingly.

On the other hand, fixed cost has the nature of less fluctuation when revenue changes. These costs may consist of expenses incurred under the supporting departments such as finance, human resource, administrative, and IT. The management will normally review the profit and loss statement (P&L statement) at least on a monthly basis to understand the company’s performance so that necessary action plans can be developed and implemented accordingly.

When the market slows down, sales revenue may drop so significantly that the bottom-line of the business can become negative. It is crucial that the management has to come up with necessary counter measures to mitigate the deteriorating performance. One area to look at is cost controls. As several variable costs are likely to be managed according to the sales trend in short term, the fixed cost is more difficult to be adjusted quickly enough. Therefore, the management may have to look into quick-win alternatives to manage this cost.

Outsourcing measures – Some work at the back end can be handled by outsourcing companies. This choice can alleviate the related costs associated with people. Some expenses such as repair and maintenance, administrative and professional work can be outsourced to third party rental.

Existing contract/agreement review – Certain outside service contracts may be signed for a long time without any review for reasonableness or necessity. It is possible that the company may incur certain costs which is no longer needed. It is worth investigate into this type of regular expenses to find room for cost improvement. Annual bidding for certain contracts – Companies may acquire supplies and service from regular vendors for a long time without proper review on the pricing. As time passes, the unit price of items purchased may not be suitable. In this case, the company may organize an annual bidding with a few suppliers for price comparison and negotiation purposes.

Consolidation of work – There might be open opportunity for efficiency improvement through consolidation of certain different work together. This job function rearrangement and re-organization can help maximize the human resource better and can enhance the morale and career path for a number of employees.

During tough business situation, many companies may choose headcount cut as a strong measure. Instead of drastic action on fixed cost management, the company should consider taking necessary actions early so that the negative impact will be at minimum. Thus, continuous improvement on fixed cost management becomes more necessary.