Cost Cutting M easures

Submitted to: Mr. Rajesh Jhamb Submitted by:

Varun Sharma um10308
Samdeep Soni um10305

Cost of capital
Cost of capital refers to the cost of equity if the business is
financed solely through equity or to the cost of debt if it is
financed solely through debt.
Many companies use a combination of debt and equity .
The cost of various capital sources varies from company to
company, and depends on factors such as its operating
history, profitability, credit worthiness, etc.
Debt financing has the advantage of being more tax-efficient.
However, too much debt can result in dangerously high
leverage, resulting in higher interest rates sought by lenders
to offset the higher default risk.

Types of cost
Fixed costs are expenses that do not change in proportion to the
activity of a business, within the relevant period or scale of
production. For example, a retailer must pay rent and utility bills
irrespective of sales.
Variable costs by contrast change in relation to the activity of a
business such as sales or production volume. In the example of the
retailer, variable costs may primarily be composed of inventory
(goods purchased for sale), and the cost of goods is therefore
almost entirely variable.
Average cost per unit is equal to total cost divided by the
number of goods produced.
Marginal cost is the change in total cost that arises when the
quantity produced changes by one unit.

Cost cutting m easures

Measures implemented by a company to reduce its expenses
and improve profitability.
Cost cutting measures may include laying off employees,
reducing employee pay, switching to a less expensive
employee health insurance program, downsizing to a smaller
office, lowering monthly bills, changing hours of service and
restructuring debt.
E.g.-Bank of America decided to layoff 30000 employees in
2012 while RBS layed off 1000 employees in India in 2013

Tools & Technique of cost cutting

Just-In-Time (JIT) System -The main aim of JIT is to produce the required
items, at the required quality and quantity, at the precise time they are
required. JIT purchasing requires for the items where too much carrying costs
associated with holding high inventory levels. Purchasing system reduces the
investment in inventories because of frequent order of small quantities.
Target Costing -Target costing refers to the design of product, and the
processes used to produce it, so that ultimately the product can be
manufactured at a cost that will enable the firm to make profit when the
product is sold at an estimated market-driven price. This estimated price is
called target price.
Activity Based Management (ABM) - Activity based management is the
use of activity based costing to improve operations and to eliminate nonvalue added cost. The main goal of ABM is to identify and eliminate nonvalue added activities and costs.

Tools & Technique of cost cutting

Life Cycle Costing - Life cycle costing estimates and accumulates costs over a
product's entire life cycle in order to determine whether the profits earned during the
manufacturing phase will cover the costs incurred during the pre-and-post
manufacturing stage.
Kaizen Costing - Kaizen costing is the process of cost reduction during the
manufacturing phase of an existing product. The Japanese word 'Kaizen' refers to
continual and gradual improvement through small activities, rather than large or
radical improvement through innovation or large investment technology.
Business Process-re-engineering - Re-engineering is a complete redesign of
process with an emphasis on finding creative new ways to accomplish an objective.
The aim of business process re-engineering is to improve the key business process in
an organization by focusing on simplification, cost reduction, improved quality and
enhanced customer satisfaction.
Total Quality Management (TQM) - Under the TQM approach, all business
functions are involved in a process of continuous quality improvement.

Tools & Technique of cost cutting

Value chain - Value chain analysis is a means of achieving higher
customer satisfaction and managing costs more effectively. The value chain
is the linked set of value creating activities all the way from basic raw
materials' sources, component suppliers, to the ultimate end-use product or
service delivered to the customer.
Bench Marketing - Bench marketing is a continual search for the most
effective method of accomplishing a task by comparing the existing
methods and performance levels with those of other organizations or other
sub-units within the same organization.
Management Audit - Management audits, also known as performance
audits, can be used to facilitate cost reduction in both profit and non-profit
organizations. Management audits are intended to help management to do
a better job by identifying waste and inefficiency and recommending a
corrective action.

Tools & Technique of cost cutting

Planned value (PV) - PV is the budgeted cost for the work
scheduled to be completed on an activity.
Earned value (EV) - EV is the budgeted amount for the work
actually completed on the schedule activity .
Actual cost (AC) - AC is the actual cost incurred in
accomplishing work on the schedule activity or WBS
component during a given time period. This AC must
correspond in definition and coverage to whatever was
budgeted for the PV and the EV (e.g. direct hours only, direct
cost only, or all costs including indirect costs).

Tools & Technique of cost cutting

Cost performance index (CPI) - A CPI value less than 1.0
indicate a cost overrun of the estimates. A CPI value greater
than 1 indicates a cost under-run of the estimates. CPI equals
the ratio of the EV to the AC. The CPI is the most commonly
used cost-efficiency indicator.
CPI=EV/AC
Cumulative CPI - The cumulative CPI is widely used to
forecast project costs at completion. CPIC equals the sum of
the periodic earned values divided by the sum of the
individual actual costs .
SPI=EV/PV

W ays to cu t cost an d in crease cash f l

ow

There are two primary rules, used by all properly managed

companies, from one-appraiser firms to Fortune 500
companies:
1. Pay your bills only when they are due.
2. Get your income as soon as possible.
Fortunately for appraisal firms, most of the costs are variable.
For example, if your work volume drops, your photo processing
and appraisal fee split labour also drop.
But fixed costs, such as rent and support staff, can cause
financial problems when appraisal assignments drop off quickly.

W ays to cu t cost an d in crease cash f l

ow

Cash management
Pay no bill before its time. Don't pay any bills until they're due. See
who has a late charge, and who doesn't.
Exercise dormant lines of credit. Frequently business owners set up
lines of credit they don't use. The bank may drop your line of credit if
it is not used for a certain period of time, so be sure to check their
use requirements.
Closely monitor your three sources of cash:
a) Appraisals in process, not yet completed
b) Appraisals billed out, but not yet collected
c) Paid billings: cash on hand

W ays to cu t cost an d in crease cash f l

ow

Rent - office and storage

Renegotiate your lease to a lower rent, or a temporary lower rent while business
is slow. If office vacancies are high, your landlord will probably prefer reduced
rent to no rent.
Sublet unused office space to appraisers or non-appraisers. Or, move out of
your larger office space to a smaller sublet office.
If you need to move or downsize to a smaller office, but have a lease, work with
your landlord. Maybe he or she will let you sublease, make a partial payment of
the rest of your lease, or move to a smaller space.
Shop around for low-cost storage space. We have to save our files for at least 5
years, and many of us save them for much longer. What to keep and throw out
in files is an individual decision, but you can shop for a lower storage cost.
Get rid of excess stored stuff, such as old office furniture. Sell it or give it away.
Don't pay storage costs for things you really don't need. Don't be a packrat.

W ays to cu t cost an d in crease cash f l

ow

Pricing
Keep close track of your competitor's costs. Don't underbid or
lose work because you overbid. When fees are changing, don't
get left behind and lose valuable assignments from
overbidding, or income from underbidding.
Don't offer lower prices to a client that isn't price sensitive.
Why give away your profits?
Know your costs on appraisals. The high fee jobs may not be
the most profitable. It may be more profitable to set up
referral alliances with appraisers in other geographic areas,
rather than spend the time traveling and doing extra research
on an area you're not familiar with

W ays to cu t cost an d in crease cash f l

ow

Personnel
Cut back principals' salaries. Pay yourself last, after paying all other
expenses. Although this may seem obvious, many companies have
developed serious financial problems because the owners kept taking
out large salaries.
"Lease" your employees. Instead of laying off an experienced secretary,
lease him or her to another company until business picks up again.
Use temporary help whenever possible when your business
substantially increases. That's how the mortgage lending industry
handled the 1991 to 1993 substantial increases in lending volumes
Use part-time support staff. They don't require benefits and usually
have more flexible hours. Laying off a part-timer, or cutting back their
hours, is much easier than a long-term loyal, full-time employee.

W ays to cu t cost an d in crease cash f l

ow

Use an outside payroll service such as Paychex or ADP to cut

bookkeeping payroll costs. Or, do it yourself by using a simple
software program like Quick books. Don't use a CPA to do
your bookkeeping.
Broaden staff responsibilities. For example, instead of paying
an outside bookkeeper, have your secretary do it. If you have
to lay off a full-time secretary because your work has
dropped, consider letting a less experienced associate
appraiser do part-time clerical work. At least they'll have
some income. Instead of having outside firms do janitorial
and delivery services, have your employees do it. It's better
than getting laid off, or sitting around worrying about getting
laid off.

W ays to cu t cost an d in crease cash f l

ow

Taxes
Don't overpay your income tax quarterlies. If you anticipate
that your taxable income will drop this year, don't pay taxes
based on last year's income. Work with your accountant to
pay quarterlies based on a more accurate estimate. If you've
already overpaid your quarterlies, ask your accountant about
a quick refund, using Forms 4466 and 1138.
Close to year-end, schedule a tax-planning meeting with your
accountant to shift income and expenses. For example, shift
income into the next year to decrease this year's taxes.

W ays to cu t cost an d in crease cash f l

ow

Supplies
Shop for the best prices. Don't pay too much attention to
percent discount. Look at the bottom line. No one pays full retail.
Purchasing supplies in bulk may be worthwhile.
Use office warehouse companies like Office Club. They usually
offer the lowest prices. Many will deliver. Don't forget discount
stores like Price Club, Wal-Mart, and Costco. Many carry some of
the most-purchased office supplies, like paper, pens, and laserjet cartridges. You don't always need to buy brand names.
Keep close track of inventory so you don't have to pay someone
to "run over" to the nearby high-priced office supply store.

W ays to cu t cost an d in crease cash f l

ow

Equipment's
Sell or donate excess office furniture and equipment. Storage space
is expensive. You can sell it to employees, the public, or the vendor
(on consignment). Donate it to local charities or schools.
When leasing equipment, get an option to cancel due to closure or
consolidation. We should not get an "evergreen clause", where the
contract always continues unless you give 30 days notice. They are
difficult to cancel, as the expiration date is hard to monitor.
Renegotiate your equipment leases
Reduce phone lines. If you have fewer staff, you need fewer phone
lines. Cancel some of the optional features you don't really need.

SB I
State Bank of India (SBI) is an Indian multinational banking
and financial services company. It is a government-owned
corporation with its headquarters in Mumbai, Maharashtra.
Initially the Imperial Bank of India became the State Bank of
India. In 2008, the government of India acquired the Reserve
Bank of India's stake in SBI so as to remove any conflict of
interest because the RBI is the country's banking regulatory
authority.
As of December 2013, it had assets of US$388 billion and
17,000 branches, including 190 foreign offices, making it the
largest banking and financial services company in India.

C om p arison of In com e & Exp en d itu re

25000

Description

May
2013

Total Income

16798

May
2014
19448

Differen
ce
2650

Variance
20000

16%
15000

Total Expenses
Operating
Result

15126

17316

2190

15%

1673

2109

436

26%

May-13
May-14

C.O.
Int.
Receivable

15829

19036

3207

20%

C.O.
Payable

12917

14683

1766

14%

Net Result

10000

Int.

5000

4585

6462

1877

41%

M ovem en t of Earn in g , Exp en ses & N et R esu lt for

M ay 2013 & M ay 2014 of S tate B an k of In d ia
25000

20000

15000
May-13
May-14
10000

5000

0
Total Income

Total Expenses

Operating Result

C.O. Int. Receivable

C.O. Int. Payable

Net Result

O verh ead s for M ay 2013 & M ay 2014 of S tate B an k

of In d ia
Description

May 2013

Telephones

May 2014 Differen

ce

14

13

Electricity & Gas

Charges

Postage

Repairs
Maintenance

&

105

103

29

18

58

72

Reasons

Figure in Crore

-1 The telephone charges have decreased

because earlier Rs. 1000 were paid to each
employee but now Rs. 500 is paid for their
telephone bills. Moreover, instead of two sim
cards, now only one sim card is given to each
employee.
-2 The electricity and gas charges have
decreased because the energy consumptions
measures provided by the authority are
being righty followed now by all the
branches.
-11 The postage overhead cost has decreased
because now the e-mail and other electronic
services are being used, therefore the
decrement.
14 The repairs and maintenance cost has
increased because there are many

O verh ead s for M ay 2013 & M ay 2014 of S tate B an k

of In d ia
Figure in Crores
Description
Stationary, Printing
& Advertising

Travelling Expense &

Halting Allowances

Medical Expenses

Misc. Expenses

May 2013

May 2014 Differenc Reasons

e
48
41
-7 The stationary, printing and advertisement costs
have decreased because of the use of electronic
services and also since the bank has now gained a
good reputation, the advertisement cost has
reduced.
107
95
-12 Halting Allowance has decreased because it depends
on the employees for how many days they have to
stay and since this year, the period of stay was less
than last year, the expense has decreased.
37
41
4 The medical expenses have increased because from
last year, the health-issues of the employees have
increased and thus we find an increment of the cost
in this particular account.
293

43

-250 The miscellaneous expenses has decreased

because earlier, separate accounts were not
maintained for each kind of expenses, but
since from this year, there has been
introduction of separate account and the
miscellaneous expenses account has been done

O verh ead s for M ay 2013 & M ay 2014 of S tate B an k

of In d ia

Figure in Crores

Description

May 2013 May

2014

Differenc Reasons
e

Controllable
Overheads

692

426

-266 The controllable overheads cost have decreased

because in most branches, the norms were followed
and therefore we find a reduction in the total cost.

Non
Controllable
Overheads

171

245

74 Non controllable overheads have increased

because most of them are fixed in nature and
therefore the cost cannot be decreased.

Total Overheads

863

671

-192 Total overheads cost has decreased due to

the effective use of the measures lay by
the authority and adapted efficiently to
gain cost reduction.

C om p arison of O verh ead s for M ay 2013 & M ay 2014

of S tate B an k of In d ia
1000

Figure in Crores

900
800
700
600
500
400
300
200
100
0

May-13
May-14

M ovem en t of O verh ead s for M ay 2013 & M ay 2014

of S tate B an k of In d ia
Figure in Crores

1000
900
800
700
600
500
400
300
200
100
0

May-13
May-14

P U N JA B N ATIO N A L B A N K
Punjab National Bank (PNB) is an Indian financial services
company based in New Delhi, India. Founded in 1894, the
bank has over 5,800 branches and over 6,000 ATMs across
764 cities. It serves over 80 million customers.
PNB has the distinction of being the first Indian bank to have
been started solely with Indian capital that has survived to
the present.
The Government of India (GOI) nationalized PNB and 13
other major commercial banks, on 19 July 1969.

P U N JA B N ATIO N A L B A N K In com e &

Exp en d itu re

Figure in Crore
Parameters

Mar09

Mar10

Mar11

Mar12

Mar13

Mar14

CAGR
(%)

Operating
Profit

5690

7326

9056

10614

10907

11384

14.88%

Net Profit

3091

3905

4433

4884

4745

3343

1.58%

Deposit

209760

249330

312899

379588

391560

451397

16.56%

Advance

154703

186601

242107

293775

308796

349269

17.69%

Total
Business

364463

435931

555005

673366

700356

800666

17.05%

B alan ce S h eet of P u n jab N ation al B an k as on M arch

31, 2014

Figure in Crore
S. No

Bank Statements

March 2014

March 2013

Difference

Variance (%)

1.

Capital

362

353

+3%

2.

Reserves & Surplus

35533

32323

3210

+10%

3.

Deposits

451396

391560

59836

+13%

4.

Borrowings

48034

39620

8414

+21%

5.

Other Liabilities and

Provisions

15093

15089

+0.02%

6.

Cash & Balances With RBI

22245

17886

4359

+23%

7.

Balances with Banks &

Money at Call & Short
notice

22972

9249

13723

+15%

B alan ce S h eet of P u n jab N ation al B an k as on M arch

31, 2014

Figure in Crore
S.
No.

Bank Statements

March
2014

March
2013

Differenc Variance
e
(%)

8.

Investments

143785

129896

13889

+11%

9.

Advances

349269

308795

40474

+13%

10.

Fixed Assets

3419

3357

62

+2%

11.

Other Assets

8727

9762

-1035

-11%

12.

Contingent Liabilities

216274

214279

1995

+1%

13.

Bills for Collection

20325

17531

2794

+16%

14.

Interest Earned

43223

41885

1338

+3%

B alan ce S h eet of P u n jab N ation al B an k as on M arch

31, 2014
S.
No.

Bank Statements

March
2014

March
2013

Differen Variance
ce
(%)

15.

Other Income

4576

4223

353

+8%

16.

Interest Expended

27077

27036

41

+0.15%

17.

Operational Expenses

9338

8165

1173

+14%

18.

Provisions &
Contingencies

8041

6159

1882

+31%

C om p arison of B alan ce S h eet of P u n jab N ation al

B an k for M arch 13 & M arch 14

Figure in Crore
500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0

M ovem en t of B alan ce S h eet of P u n jab N ation al

B an k for M arch 13 & M arch 14

Capital

Reserves & Surplus

Deposits

Borrowings

Other Liabilities and Provisions

Cash & Balances With RBI

Balances with Banks & Money at Call &

Short notice

Investments

Advances

Fixed Assets

Other Assests

Contingent Liabilitites

Bills for Collection

Interest Earned

Other Income

Interest Expended

Operational Expenses

Provisions & Contingencies

N PA
N PA (N on -P erform in g A sset) is an industrialphenom enon w hich indicates
industrialsickness. The nationalgrow th of a country particularly country like India
depends upon the grow th and health of SM Es. The so called banking reform are
targeted tow ards killing the Sick units rather than curing them .
Ef f
e ct of N PA on B an k
The day to day operating the account becom es dif f
cult as Bank starts adjusting
i
m oney deposited against their dues.
The reputation of the borrow er in the m arket is adversely aff
ected.
The Bankers attitude tow ards the borrow er becom es m ore arrogant, authoritative
and threatening, instead of extending helping hand to them to get out of the
situation.
This leads to dem oralization of the borrow er w ho has been w orking w ith the Bank
for num ber of years and as custom er has contributed in the profi
t of the Bank.
The principle of custom er care is neglected and custom er torture begins. This
brings the borrow er in a helpless situation and at the m ercy of the Bank

N PA
B an ks in terest in com e can fall d ow n an d accou n ted on th e b asis of
receip t.
P rof i
tab ility of B an ks is cau sed h arm fu lly d u e to of f
e rin g of d ou b tfu l
d eb ts an d en su in g con tain it as terrib le d eb ts.
R O I (R etu rn on in vestm en ts) is d ecreased .
Th e ad eq u acy ratios of cap ital are term ed as N PA s an d are follow in g
in to its estim ation .
M axim izes th e cap ital p rice.
V arian ce of liab ility an d assets w ill exp an d .
EVA (Th e econ om ic valu e ad d ition ) b y b an ks g et trou b le for th e
reason th at EVA is sim ilar to th e p rof i
t of n et fu n ction in g less cap ital
cost an d
It m arg in s fu n d s recyclin g .

R eason s for N PA
Economic slowdown in the National and International Sectors. Here, bank
just can't do much.
Default by So called Ultra High worth Corporates and Individuals SBI, the
leader of the consortium of banks that have lent funds to Kingfisher
Airlines, has an exposure of Rs 1,457.78 crore to the struggling firm. SBI's
exposure is the highest among any of the lenders to the airline, followed
by IDBI Bank (Rs 727.63 crore), Punjab National Bank (Rs 710.33 crore),
Bank of India (Rs 575.27 crore) and Bank of Baroda (Rs 537.51 crore).
Credit Management is not a thing of FOCUS for the present leadership of
SBI. They are busy in playing the game for Individual Margins through SBI
Life and SBI Mutual Fund. The focus of the Higher Management has been
shifted to earning more PERSONAL Commissions through cross selling of
the policies of SBI Life and SBI Mutual Fund

En erg y con su m p tion in B an ks (R B I G u id elin es)

It will be beneficial if lights and fans are switched-off before leaving the seat or during lunch
hours.
It will be better for the energy saving purpose if monitors are switched-off when not in use.
Scheduling switching on and off of lights and A.Cs on by 10:00 AM and switched off by 5:00 PM at
offices/branches except Air conditioners of server room can be used in order to decrease the cost
of electricity.
24 deg. C or above temperature in AC area shall be maintained as reducing the temperature
further by over 1 deg. C can consume approximately 3% more power. Therefore this will help in
electricity saving.
Display/showcases can be turned off at night to save electricity consumption.
The reduction of the number of lifts operating during non-peak hours at offices/branches (i.e.
11:00AM to 1:00 PM and 3:00 PM to 4:30 PM) and residential buildings (i.e. 11:00 AM to 5:00 PM)
can save the cost.

S u g g estion s for cost cu ttin g

The bank has 14 stationery departm ents to supply A4 size papers, ballpens, pins and clips to 14 circles of the
bank. These departm ents em ploy severalhundred w orkers.D oes a bank need such a division w hen a
Flipkart.com can take care of such needs? Sim ilarly, it has 14 processing centres to scrutinize new depositors
form s,em ploying at least a couple of thousand people. Its a m ystery w hy SBIneeds data processing centres for
every circle w hen m ost foreign and new private banks run one centre to process such data across India.

Yet another cost centre is the currency chests that SBIhas historically been m anaging on behalf of the Reserve
Bank of India. O f the 4,200 currency chests across India, SBIruns 2,200 or 52% of them w hile its m arket share in
loans and deposits is around 17% . Assum ing that each currency chest on average needs about six arm ed
guards, m ore than 13,000 such arm ed guards are on the payrollof the bank. W hile cash m anagem ent is a
criticalactivity for the banker to the nation, surely there are m odern cash replenishm ent and logistics
alternatives that can m inim ize use of guards and space.

Another area w here the bank m ust look into is its 41,000-odd ATM netw ork for the group. In N ovem ber, the SBI
group roughly accounted for 41% of the 380 m illion outstanding debit cards (and 45% of the total530 m illion
transactions) but its share in the ATM netw ork w as far less, at 30% . As a result, the banks custom ers use other
banks ATM s for w ithdraw alof m oney. U nder norm s, up to fi
ve such transactions are free.W hile the custom ers
m ake free transaction at other banks ATM s,SBIneeds to pay Rs.18 per transaction. Indeed,SBIalso m akes
som e m oney w hile other banks custom ers use its ATM s but thats far less than w hat it pays to other banks. It
possibly needs to take a look at the locations of its ATM s to increase the footfalls. It can also explore w hether it
can charge on its ATM use. There are roughly 8 m illion ATM transactions a day and even if it charges Rs.1 per
transaction, it can earn Rs.300 crore a year.

S u g g estion s for cost cu ttin g

The biggest challenge before the bank, at this point,is m onitoring its bad assets, about 60% of w hich originate from m idcorporates and relatively large am ong the sm alland m edium enterprises (SM Es),the com panies w hich are not diversifi
ed,
and another 25% from low -ticket accounts from retail, agriculture and sm allbusinesses. The bank m ust give up its
traditionalm odelof focusing on m anualsupervision w hich is alm ost im possible w hen one needs to track m illions of
accounts. Apparently, som etim e back it had set up an account tracking and m onitoring platform , called ATM ,for realtim e
m onitoring of stressed accounts, but it has not been put to proper use.

Loss th rou g h ATM

According to SBIs data, its em ployees transact about 280,000 ATM card-sw ipes in other bankscash m achines per m onth.
This costs the bank about Rs. 42 lakh plus taxes. Every card sw iped at other banks ATM m akes that branch richer by Rs.
15.For SBI,this is reducing profi
ts by a staggering Rs. 5 C rore a year.

Bank can thus ask the em ployees to use their ow n banks ATM to carry out the transaction; this w illhelp the bank to have
stronger relationship w ith em ployees. This step is an addition to the slew of m easures being taken by the bank to reduce
expenditure.

At present the fi
rst fi
ve transactions in the non- parent bank are free of cost, and the parent bank has to pay the cost.This
w ould m ean that each bank w ould have to foot the billfor these transactions.It has been found out that ATM interchange
fees also increased to Rs 273 Crore, a 29% increase, at the end of D ecem ber 2013. Further it has been discovered that
bank w illgo slow on hiring of em ployees as w ell,because the bank has noticed an upsurge of 35% in the expenses of the
staffw ithin a couple of years.