Not all costs should be treated the same. Target costing can be split into 2 groups:
Group One: Strategic Costs:
- Costs that are incurred producing a Profit on the bottom line.
- In a sales organisation this is face to face sales people (but not their managers) and advertising if it is working.
Group Two: Non-Strategic Costs:
Focus intensely on these costs!
- All other costs that are necessary to run the business but will not bring in more business themselves.
- This includes a range of administrative costs like:
- Managers of various sorts.
- Clerical staff.
- Real estate.
- Office supplies.
A Target Cost slashing exercise with these costs can be productive without damaging the business.
Therefore, these are the ones to intensively focus upon first.
It is necessary to apply the 80/20 rule quite heavily in this section of the discussion.
Not sure about the 80/20 Rule?
Go to the Skills Module introduction: SM2.0 80/20 Sales Growth; Double Sales, Triple Profits
The 80/20 Rule states that a minority of causes, inputs or effort lead to a majority of the results, outputs or rewards.
Taken literally, this means that 80 percent of what you achieve comes from 20 percent of the time spent.
For more specific information on carrying out these analyses enrol in the Skills Module (3 x complimentary with this Campaign):
Go to the article: SM2.6 80/20 Business Analysis
Contact us to open your enrolment
For more advanced methods, using spreadsheets, go to the article: SM2.5 How to do an 80/20 Data Analysis