OPPORTUNITIES TO REDUCE OPERATING EXPENSES IN INDUSTRIAL ENTERPRISES

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1 Proceedigs i Maufacturig Systems, Volume 8, Issue 3, 203 ISSN OPPTUNITIES TO REDUCE OPERATING EXPENSES IN INDUSTRIAL ENTERPRISES Cătăli GHEGHE ) Lecturer, PhD, Departmet of Egieerig ad Idustrial Maagemet, Trasylvaia Uiversity of Brasov, Romaia Abstract: May specialty papers itroduce the issue of costs ad processes to reduce them. However, they do ot specify the circumstaces i which it is compulsory to reduce expediture ad those this goal is optioal. Also, there is ot a logical sequece of reducig expediture ad a miimum value of the costs, below which they caot be reduced without affectig the activity of the compay. Based o these theoretical elemets, this paper focuses maily o reducig expediture i a idustrial eterprise. The paper is circumscribed to private legal etities, irrespective of their capital membership, size or scope of activity udertake. Thus, the author aims to determie the situatios i which decreasig the costs is compulsory, as well as to idetify a methodology to reduce them by aalyzig the mai operatioal expese categories. Also is established a methodology to reduce costs by aalyzig expediture categories that have a large share i total expediture ad highlights the practical possibilities of materializig them. For this purpose there are theoretical ad practical elemets ecessary to detach coclusios ad supportig scietific edeavour. To illustrate the scietific eterprise is cosidered a data structure of a idustrial eterprise. With it are idetified categories of expediture that ca be reduced to improve the activity. Key words: operatig expeses, eterprise, idustrial, methodology of reducig expeses.. THE CURRENT STATE OF THE PROBLEM As a geeral objective, permaet or temporary, cost savigs are a cocer that is foud i the majority of families, busiesses, state level ad state istitutios. Of the busiesses listed, the article is circumscribed to private etities, regardless of their capital, busiess size or scope of activity udertake. The costs are reflected i all busiesses, sice it is a goal that will geerate a competitive advatage [2, 3]. Achievig the objects of each operator requires the use of all elemets that make up the labour process. Some of these are cosumed i the productio process or marketig, aother part is depreciatig, while others must be paid. Regardless how they ca be used, the material, fiacial resources, huma or eviromet resources used i the eterprise geerates costs [6]. 2. GANIZATION OF RESEARCH For research, it should start from meetig its objectives. I relatio to the theme of the work, the research is aimed to achievig the followig objectives: settig the positio of the reductio i expediture compared to the fudametal objective of the eterprise; determiig the situatios the eterprise must reduce costs. Oly some situatios facig a eterprise determied reducig costs; * Correspodig author: 29 Eroilor, Brasov, Romaia, Tel.: ; Fax: address: gheorghe.c@uibv.ro (C. Gheorghe) idetifyig the categories of expeses that ca be reduced. To this ed the mai categories of expediture are aalyzed; example of the scietific approach i a real data structure. Methodology for cost reductio will be applied to a real data structure. Achievig the paper objectives is doe based o theoretical ad practical elemets preseted i the literature. A methodology is established to reduce costs by aalyzig expediture categories that have a large share i the total expediture ad highlights the practical possibilities of materializig them. For this purpose, there are theoretical ad practical elemets ecessary to detach coclusios ad supportig scietific edeavour. 3. POSITION OF EXPENDITURE ON THE MANAGEMENT OF INDUSTRIAL ENTERPRISES The fudametal objective of the compay must be idetified i the ecoomic theories or i the fiacial statemets. Summarizig the coclusios therei, there it should be oticed that the fudametal objective of fiacial maagemet is to maximize the eterprise value. Geerally, value is a complex category at the eterprise level that ca be assessed i relatio to the assets curretly held or expected results i the future, through the use of accumulated assets. I this respect, the compay is a variable that takes ito accout expected preset value correlated with expected future reveues geerated from busiess activities [, 22]. From the backgroud a coclusio is draw, amely that reducig costs is ot the primary objective of the compay. If spedig cuts should be the primary objec-

2 36 C. Gheorghe / Proceedigs i Maufacturig Systems, Vol. 8, Iss. 3, 203 / tive of the compay, the oe should always follow their reductio over time. For example, iterest expese arisig from loas made by the compay i the curret or previous periods is cosidered. These expeses may be void if the orgaizatio waives loas. Absece of leverage will leave the compay oly alterative equity fiacig activity i solutio that esures stable but slow growth. To this coclusio it should be added that, i aalyzig various types of cosumptio, ota bee, usually for efficiet operatio, makig a icome requires expediture ad vice versa. Expediture-icome relatioship is valid default for operatig activities, crucial for idustrial eterprises. Exceptios to this rule occur if fiacial ad exceptioal expeses ot geerate reveue as reveue realizatio ot ecessarily ivolves items of expediture. From the above it results that ay aalysis of expeditures, total or by category of activities shall be carried out separately, but i close correlatio with the icome categories whose accomplishmet cotributes. 4. COST REDUCTION METHODOLOGY Eterprises i the ecoomic eviromet ca be delieated ito three categories, depedig o the ecoomic ad fiacial results obtaied: A) Profitable eterprises, characterized by high rates of earigs, that record permaet cash surplus over several years i a row. I their case it is ot compulsory to save moey, but rather their supervisio. I their case it is madatory spedig cuts. More suitable are the actios that lead to their ecoomic growth such as: - ivestig i tagible assets; - peetratio o foreig markets; - opeig ew braches or subsidiaries; - allocatio of resources to their ow research aspect; - assimilatio of ew products; - addig value to products maufactured; - studies ad research o possible takeover or absorptio processes of profitable busiess; - diversifyig fiacial ivestmet portfolio. B) Low retur busiesses or those that are easy to cover the accumulated loss of previous years. The fact that those busiesses fall ito such a category is because the market has brought here, due to lower reveues. Actios aimed at icreasig icomes are desirable, but they are usually theoretical. For them the best is to aalyze costs ad idetify ways to reduce some of them; C) Uprofitable busiesses experiecig sigificat losses which have take equity accumulated i previous periods. The aalysis may result i expediture solutios, but they should be doe i a prior period. Rather, these compaies are turig to reorgaizatio or recapitalizatio by shareholders or shareholders' agreemet. Geerally these busiesses are facig a egative equity ad et situatio. The latter is defied as the differece betwee total assets ad total debts: Net situatio = Total assets - Total debts. () A egative et situatio is the result of egative et loss coclusio of the curret year or previous years. I this case, total debt cotracted by the compay exceeded the real asset. The egative value of the et shows a bakrupt situatio, but caot be istalled i a very short period of time. There are sigs should ot be eglected by the fiacial maager, for the period precedig the most importat beig: - profit reducig; - decrease of other fiacial idicators; - icreasig cash deficits; - shift from profit to loss; - gradual cosummatio of equity. May of the compaies from this category go to a reorgaizatio process. The law of isolvecy stipulates two categories of judicial reorgaizatio [6]: - reorgaizatio based o the partial capitalizatio of the debtor s assets, i view of payig off the liabilities declared ad accepted at the statemet of assets ad liabilities; - reorgaizatio based o a operatioal ad/or fiacial recovery havig as cosequece a debt satisfactio at least to the share obtaied i case of bakruptcy. Year Evolutio of miimum aual salary durig period The miimum aual salary (RON) [7 6] Average exchage rate RON/ EUR Miimum aual salary (EUR) Table

3 C. Gheorghe / Proceedigs i Maufacturig Systems, Vol. 8, Iss. 3, 203 / Fig. 2. The average iflatio rate durig (% ). It is importat to metio that i the Romaia legislatio o legal provisios exist that should automatically lauch bakruptcy, as i other Europea coutries. The reorgaizatio ad bakruptcy procedure i Romaia may start either through the applicatio addressed by the debtor himself, i isolvecy, or by the creditors uder the followig coditios [6]: - the creditors have ot bee paid for at least 30 days; - the debts of tradesma, come from labour or civil relatios, are greater tha six average wages o ecoomy, settled accordig to the law; - the tradesma s debts, come from commercial relatios. The advatages resulted followig the researches carried out as well followig the cosultatio of the compaies havig cofroted themselves with such a situatio are: - the isolvecy procedure is a solutio for the debtors as, ever sice the date of its opeig, the rise of the liabilities is stopped ad the assets of the compaies are coserved, due to the most importat effect of the procedure, which is the iterdictio upo the iterest flow. delay pealty ad icrease at ot guarateed debts; - the debt recovery by the debtor is doe with the exemptio of the stamp taxes; - all judicial ad extra-judicial actios lauched upo the debtor are stopped; - the maiteace withi the busiess circuit of the hoest debtor, i a repairable fiacial situatio (the debtor has the possibility to cotiue his activity, however complyig with the coditios established through the reorgaizatio pla); - recoverig debts, to a higher extet tha i the case of bakruptcy; - maitaiig the workig places, at least for part of the employees; - i the relatio with the debtor withi the judicial reorgaizatio procedure, the suppliers should ot be affected. At the same time, several disadvatages were idetified, of the most importat are: - the cofirmig procedure of the reorgaizatio pla proves to be particularly complex; - real icoveieces for the creditor: suspedig the idividual pursuits agaist the debtor, freezig the debt at its omial value durig the procedure opeig; - the practice shows that the debtors with reduced turover ad with limited assets have o real reorgaizatio chaces; - situatios existed i a creditor itroduced the procedure opeig applicatio, ad the debtor, beig solvet ad ot watig to eter the procedure, util the first peremptory date, paid off his debt. If the creditor s positio is cosidered, there has to be very well kow whether the procedure is efficiet to this purpose, as a solvet debtor will ever accept to eter this procedure ad will obviously pay off promptly the back debt (the treasury exposure. already submitted to pressure. because of the lack of cashig ad of liquidities). - iflexibility of the cotractual parters; a compay withi reorgaizatio o loger beefits from the support of the cotractual parters, who cout may times i icreasig the recovery chaces; - the procedure is public, which leads to the creatio of a egative situatio upo the compay: you are labelled you are i reorgaizatio which, i the opiio of may compaies, meas bakruptcy. To icrease the competitiveess, may works commed cuttig costs. The challege ca hardly be traslated ito practice i a emergig ecoomy iflatio show i Fig. remais stubborly high ad the miimum wage (or average) the ecoomy is growig. The presece of iflatio causes price icreases of raw materials, materials ad eergy resources is ofte, fudametal to ay product cotaiig material. Table shows the value of the miimum wage established uder the Romaia legislatio. Average exchage rate of the atioal currecy agaist the euro currecy quotatios media is aouced by the Natioal Bak of Romaia for some time. It is calculated as the simple arithmetic average of daily exchage rates for a period of oe year [23]. It is foud a icrease of the miimum wage, which represets the wage policies of public ad private employers. Data o aual miimum wage expressed i RON takig ito accout that July 2005 was held domestic currecy [8]. The data preseted shows that market due to objective causes icreases the maufacturig costs of idustrial products, while the literature shows the eed to reduce their. A few rules for the idetificatio of udertakigs ad it is ecessary to reduce costs were previously detached. Before reducig the costs, the first directio i

4 38 C. Gheorghe / Proceedigs i Maufacturig Systems, Vol. 8, Iss. 3, 203 / takig actio will be i the area of icomes, aimig to icrease them. Of course, these actios will be accompaied by reductio of costs accordig to what logic will be removed. Reducig costs will start from total expediture. I this respect, the procedures made available by literature are [9, 20]: A) Dyamic aalysis of costs; B) Study of the structure ad compositio of expediture; C) Calculatio of efficiecy of expediture rates; D) The applicatio of factor aalysis models. Amog the most effective there are the processes listed uder poits C ad D. To this ed, calculate ad model the dyamic efficiecy rates of total expeditures by reportig their volume, total reveues for the respective periods [7]. Sice the process will always lead to the eed to icrease reveue, such solutios are ot listed as they were previously treated. The first examied are the total expediture to be reported the total reveues costitutig a efficiecy rate. Tracig the evolutio of the expediture total reveue is at a average rate of efficiecy of the overall expediture (or cost per 000 RON total reveue) determied by the relatioship: Ei R ET = 000, (2) R R ET represets the average rate of efficiecy of the E i total expediture; R i category of activities; i amout of expediture by amout of reveue by category of activities. Reductio of the rate level equals with a icreased efficiecy with which fiacial, huma, material ad evirometal aspects of the compay were used. Similarly, icreasig the value of the report shows a declie i the efficiecy of the eterprise [2]. Such a procedure does ot usually lead to solutios, but rather a overview of the compay's reveue ad expediture ad o the formatio of the gross icome. Therefore, aalysis should cotiue, observig previously idetified. Oe should proceed to aalyze operatig expeses, as they held at the idustrial eterprises, the largest share i total expeses. As a result, their sum is i close depedecy with the objects of the compay. The average efficiecy of operatig expeses will be calculated by the relatioship: OEi R OE = 000, (3) R OE represets the average rate of efficiecy of i operatig expeses; OE i amout of operatig expediture by types of activities; i amout of icome from exploitatio by types of activities. Categories of expediture shall be determied with the largest share i the total of those i service. Ay solutio to reduce them will result i a ecoomy that will result i relative profitability. From the structural poit of view, the ruig costs comprise the followig items: A) Expeses relatig to the cosumptio of raw materials, auxiliary materials, fuels etc. B) The costs of the work ad services performed by third parties; C) Expeses with taxes, fees ad similar paymets icurred by the patrimoial uit; D) Staff expediture; E) Expese with depreciatio of fixed assets; F) Other operatig expeses. From the previous eumeratio oe ca see the large umber of operatig expeses. Theoretically, we ca create efficiecy rates or other computatioal models ad aalysis. Next it will examie each elemet to idetify the practical possibilities of fidig solutio. A) The aalysis of raw materials ad the materials will be performed usig a rate set efficiecy agaist a cosistet icome category. Thus, also a efficiecy ratio is obtaied called the costs of materials to 000 RON operatig reveue (or turover): Erm Erm Erm = 000, (4) costs of raw materials to 000 RON operatig icome; E rm costs of raw materials ad materials; operatig icome. The relatioship of computatio shows that the directios for actio are: raisig reveues placed i the umerator ad/or deomiator costs decrease. As the first solutio has already bee idetified, it remais the reductio of raw materials ad materials which ca be expressed as: = E c p, (5) rm j c sj specific cosumptio of material resources j; p j price of the resource materials supply j. The form of expressio idicates that ay possible reductio i material costs by reducig specific cosumptio ad / or supply to obtai lower prices. The first solutio is more cosistet ad should be a costat cocer. Solutios are maily techical ad egieerig cocers may aspects of desig ad techology, maufacturig ad purchasig. The secod oe is coditioal o quatities purchased, paymet ad bargaiig power; B) Expeditures geerated by the services redered by third parties shall be expressed as a rate of efficiecy as follows: 000 Ews Ews = 000, (6) sj j

5 C. Gheorghe / Proceedigs i Maufacturig Systems, Vol. 8, Iss. 3, 203 / ws E 000 costs of the works ad services to 000 RON operatig icome; E ws costs of the work ad services executed by third parties. The thikig is similar ad will lead to reduced expediture o these activities. The solutios ca be: waivig of some services or works isofar as they do ot affect productio or ivestmet activity, or fidig service providers or performers of works which offer lower rates. C) Expediture with taxes, fees ad similar paymets icurred by the patrimoial uit coduct, accordig to the same reasoig, to the desire to reduce their amout. Although theoretically may cosist of aalysis of models for the reductio ad their applicatio will result i the eed for legal chages, uable to look, or speculative, uethical behaviours which, eve beig legal, are ot advisable. D) Staff expeses ca be expressed as: Es Es Es = 000, (7) expediture o staff to 000 RON operatig icome; E s staff expediture. Staff costs aalysis will be doe i cojuctio with the aual average labour productivity. Labour productivity growth ad that of the average salary costitute a itegral part of the salary policy of the eterprise. Advacig growth of the average wage by average labour productivity leads to savigs o the wage bill, which is reflected positively i icreasig the rate of efficiecy of the overall expediture [5]. E) The aalysis of depreciatio expese relates to the issue of depreciatio, physical wear moetary value of fixed assets icluded i cost of products. Depreciatio is a elemet of productio costs i geeral ad admiistrative expese i particular. Whatever form of expressio of the idicator is take as the basis of compariso, depreciatio aalysis will be performed throughout the activities of the compay. If depreciatio expese is reported i operatig icome a differet rate of efficiecy is obtaied: E 000 d 000 D Ed = 000, (8) depreciatio expese to 000 lei operatig icome; D amout of depreciatio expeses. O amout of depreciatio there is ifluece from the average aual value of fixed assets, fixed assets ad a average rate of depreciatio has bee recorded. A a D =, (9) 00 f A f average aual value of fixed assets; a average rate of depreciatio. Cotiuig the approach will lead to lower depreciatio expeses, somethig which, accordig to the relatioship ca be achieved by reducig the value of fixed assets ad / or average rates of depreciatio. Reducig the volume of fixed assets is ot desirable (oly i certai circumstaces) otherwise it appears as a process of disivestmet, or equipped with lower level techologies. The, the solutios ca oly be achieved by reducig the average rates of depreciatio. Sice they are calculated as weighted arithmetic average, it would mea that times have chaged average depreciatio of fixed assets govered by the legal elemets! It still idetifies a category of expediture that caot be reduced, but their cotet traslates to better capitalizatio of fixed assets owed by the eterprise. E) Other operatig expeses such as losses from a theoretical claim ca be theoretically aalyzed but their share is small, the solutios will have egligible impact o busiess profitability. For example, cosider a data structure preseted i Table 2. I colums 2 ad 3 data from the profit ad loss accout of a compay o two cosecutive years [4] was extracted. Colums 4 ad 5 iclude efficiecy rates for each category of expediture. Respectig the theoretical elemets preseted above, the followig coclusios could be draw: operatig costs expressed per 000 RON operatig icome accoutig for a larger share of RON (period 0) to RON (period ). This shows of profitability of service degradatio ad the eed to reduce costs; the largest share is accouted for by expediture o raw materials ad materials i both periods. The icrease i value from RON i the period 0 to RON i the ext period, their reportig to the same category of reveue; staff expediture is sigificat ad icreasig from RON i the period 0 to RON i the period. They ca be aalyzed with the aim of fidig solutios to reduce them. accordig to the productivity of those two periods; other expeses have little clout, havig little impact o reducig their profitability of the eterprise, while others caot be reduced. 5. CONCLUSIONS Reducig costs is ot a objective itself, but rather as oe particular provisio uder certai circumstaces these could be at the eterprise level. I situatios we have to reduce expeses, the article makes available some logic to this approach that applies to fidig cocrete solutios. I most cases, i order to reduce the costs, it proceeds to their aalysis. Always spedig it will report reveue ad ot vice versa, causig the emergece of reveue expediture. The startig poit is the total expediture ad the approach cotiues with the categories of expediture that hold the largest share, up to fidig solutios.

6 40 C. Gheorghe / Proceedigs i Maufacturig Systems, Vol. 8, Iss. 3, 203 / Average efficiecy of operatig expeses betwee 0 ad period Table 2 Efficiecy rates for each Name Amout (RON) category of expediture (RON) Period 0 Period Period 0 Period.a. The costs of raw materials ad cosumable materials Other material costs b. Other expeses from outside c. Expediture o goods Staff expediture a. Salaries b. Expediture o social protectio ad isurace a. Depreciatio ad provisios for depreciatio of fixed assets amouted a.. Expeses a.2. Reveue b. Adjustmet of the amout of circulatig assets b. Expeses b.2 Reveue Other operatig charges Expediture o exteral services Expediture o other taxes. fees ad similar paymets Compesatio expeses. doatios ad assets will be trasferred to Total operatig expeses Total operatig icome REFERENCES [] P. Brezeau, Gestiuea fiaciară a îtrepriderii î ecoomia de piață (Fiacial Maagemet of the Eterprise i a Market Ecoomy), Publishig Foudatio "Romaia of Tomorrow", Bucharest, 999. [2] Y.H. Chag, P.C. Shao, Operatig cost cotrol strategies for airlies, Africa Joural of Busiess Maagemet, Vol. 5 (26), 28 October, 20, pp [3] Q. Gao, Research o Cost Cotrol ad Maagemet of Real Estate, Joural of Busiess ad Maagemet, Vol. 4, No. 2, December 2009, Najig, Chia, pp. 42. [4] C. Gheorghe, Aaliza ecoomico-fiaciara a itrepriderii (Ecoomic ad Fiacial Aalysis of the Compay), Trasilvaia Uiversity of Brasov Publishig House, Brasov, [5] C. Gheorghe, Asupra fialităţii studiilor ecoomicofiaciare post-factum (Above the Purpose of Ecoomic ad Fiacial Post-factum Studies), Recet Review, Vol. 2, No. 4, Brasov, 200, pp [6] C. Gheorghe, Above Purposes of the Bakruptcy Legislatio i Romaia Durig Fiacial Crisis, WSEAS Iteratioal Cofereces Trasylvaia Uiversity of Brasov, Romaia, April, 20, Proceedigs of the 2th WSEAS Iteratioal Coferece o Mathematics ad Computers i Busiess ad Ecoomics, Brasov, pp [7] Romaia Govermet, Govermet Decisio No, 23 Official Joural of Romaia, No. 83 from [8] Romaia Govermet, Govermet Decisio No, 05, Official Joural of Romaia, No. 752 from [9] Romaia Govermet. Govermet Decisio No. 55. Official Joural of Romaia. No. 920 from [0] Romaia Govermet, Govermet Decisio No. 2346, Official Joural of Romaia, No. from [] Romaia Govermet, Govermet Decisio No. 766, Official Joural of Romaia, No. 82 from [2] Romaia Govermet, Govermet Decisio No. 825, Official Joural of Romaia, No. 025 from [3] Romaia Govermet, Govermet Decisio No. 507, Official Joural of Romaia, No. 877 from [4] Romaia Govermet, Govermet Decisio No. 05, Official Joural of Romaia, No. 649 from [5] Romaia Govermet, Govermet Decisio No. 93, Official Joural of Romaia, No. 824 from [6] Romaia Govermet, Govermet Decisio No. 225, Official Joural of Romaia, No. 922 from [7] Romaia Govermet, A. Isfaescu, V. Robu, A.M. Hristea, C. Vasilescu, Aaliză ecoomico-fiaciară (Ecoomic ad Fiacial Aalysis), The Bucharest Uiversity of Ecoomic Studies Publishig House, Bucharest, 2003, pp. 07. [8] Romaia Parliamet, Law o. 348 from 4 July 2004 Regardig Natioal Currecy Deomiatio, Official Joural of Romaia, No. 664 from [9] D. Margulescu, C. Staescu, I. David, Aaliza ecoomicofiaciară (Ecoomic ad Fiacial Aalysis), OSCAR PRINT Publishig House, Bucharest, 999. [20] D. Margulescu, G. Vilceau, D.I. Cismasu, Serba C., Aaliza ecoomico-fiaciară (Ecoomic ad Fiacial Aalysis), Publishig Foudatio "Romaia of Tomorrow", Bucharest, 999. [2] V. Robu, N. Georgescu, Aaliză ecoomico-fiaciară (Ecoomic ad Fiacial Aalysis), OMNIA UNI SAST SRL Publishig House, Brasov, 2000, pp. 5. [22] I. Stacu, Fiaţe. Teoria pieţelor fiaciare. Fiaţele îtrepriderilor. Aaliza şi gestiuea fiaciară (Fiace. Fiacial Market Theory. Fiace of Eterprises. Aalysis ad Fiacial Maagemet), Ecoomic Publishig House, Bucharest, 997. [23] Natioal Bak of Romaia, Aual Report available at: accessed: