Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Cost Cutting through Green Expense Strategy: A Case Study
on COMSATS Institute of Information Technology
Sabahat Nisar* and Rabia Asif**
The accelerated profit of any Organization stands on the pillars of sustainable
growth in sales and effective expenses management strategy. For growth in
sales an organized marketing department is in a field, on the other side
extensive attention is not given to expense management specially cost cutting.
Therefore, it is necessary for Organizations to devise and implement an efficient
expense management strategy.
Large numbers of expenses are incurred to generate single source of revenue
i.e sales. Therefore, every expense carries a specific force to contribute in
sales. In accumulation these forces generate revenues and positive cash flows
for Organization. When the expenses are incurred the force activities and
contribute to Sales. Some expenses extensively force to sale and some slightly.
Keeping in view this force/impact factor to sales, the expenses are divided into
three categories namely red (forced), white (Semi forced) and green (Least
Forced) expenses. The objective of the study is to focus on the Green
Expenses strategy that could be used either to reduce or completely eliminate
the expenditures or ultimately converting these expenses into profits if possible.
So, this paper is written to understand the Green Expenses strategy and to
provide guidelines to implement this strategy. For implementation, first the
expenses are studied in detail by cost controller/Internal auditor then expenses
are identified whether red, white or green. For better understanding these
expenses should be colored in financial statement. After, identification of green
expenses, it should be studied in detail and effectively implemented and finally
these green expenses may either be reduced at significant level or eliminate or
turns into profit through effective strategies. This is an idea based paper. For
the implementation of Green Expense Strategy, COMSATS Institute of
Information Technology, Lahore campus is chosen as case study.
Keywords: Expenses Management, Green Expenses, Organizational Strategy1
Introduction
This is obvious that expenses are incurred to generate revenues. Organizations incur
large list of expenses to generate periodic revenues. If we look into Profit and Loss
account, there are multiple expenses which are incurred to generate the Sale. Some of
these expenses are more intense to generate sales i.e advertising expense, salaries
expense, salesmen commission, building rent etc. which are normally unavoidable. Few
expenses are neutral to sales i.e repair and maintenance, printing & stationery,
1
*Sabahat Nisar, Internal Auditor, COMSATS Institute Of Information Technology, Lahore Pakistan. Email:
sabahatnisar@ciitlahore.edu.pk; Contact: +923334286623
**Rabia Asif, Assistant Professor, Department of Management Sciences, Lahore College for Women University,
Lahore Pakistan. Email: rabia_pms@hotmail.com: Contact: +923334286623
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
insurance and financial cost etc. On the third side, there is another category of
expenses that are less relevant to sales as compared to above mentioned expenses i.e.
entertainment, IT consumables, electrical consumables and bad debts etc. Dependent
upon the nature and objective of the business, the relevancy of the expenses matters a
lot. In this sense, it is essential to determine the impact factor of expenses over
revenues. It is also important to keep in mind that nature of expense either forced; semi
forced or unforced may vary organization to organization. Precisely, more the force of
expenses, more contribution to sales and hard to control.
The cost controller‟s most commonly internal auditor should study expenditures in detail
and should devise strategies to reduce or eliminate the force of expenses to ultimately
enhance the Organizational Profitability. In this context, the organization should reduce
some selected expenditures periodically by taking all stakeholders in confidence.
Normally, in Pakistan public sector organizations are least concerned with the reduction
of expenses due to the lack of ownership of funds. Comparatively, private sector
organizations works in opposite directions .The fund generation of private sector
organizations is better than the Govt. Sector due to the effective cost control strategies
as a major factor. It has been observed while studying income statement of different
organization (mostly education sector) that normally 20% to 25% of expenses have fall
under semi forced or unforced expense. By controlling such expenditures rationally, the
profitability may enhance up to 20 to 25%.Therefore, it is very much essential to identify
the relevancy of expenditures to rationalize the expenditures. Keeping the same track,
cost cutting technique provides a base line to cut down expenditures according to their
force. The paper is written, in the context that the force of expenses should be identified
in form of colours.
Objective of Study
One of the major objectives of this study is to enhance the control of Cost Controller
through the colours of expenses. These colours reflect the sensitivity to control the
expenses. The sensitivity of expense differs from business to business. This will provide
better understanding for Cost Controller to differentiate expenses on the bases of
colours. These colours may be reflected in Income statement which will assist
stakeholders to understand nature of expense with reference to sensitivity to sales. The
ratio of these expenses to overall expenses may also effect the decision making of the
stakeholders. For example, red expenses are 40% of total expenses; this might be an
alarming situation for decision maker. This paper is written while keeping in view the
cost structure of Public Sector Universities of Pakistan. But the scope of this study
cannot be limited.
Literature Review
This is an idea based paper that will contribute in accounting theory and practice. The
paper is based on understanding the nature of individual expense in terms of its force
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
towards sales. Currently no literature is available on this topic as researchers have not
explored nature of expense under such context.
Data and Methodology
This research paper based on categorization of expenses in colours. These colors can
be used to identify force of expense towards sales. Therefore, no need to apply any
statistical methodology for expenses differentiation. Data for the study has been taken
from Public Sector Universities of Pakistan. The scope of study cannot be limited to
specific sector. In order to practically prove the concept a case study is also the part of
paper that will help readers to understand the importance of expenses bifurcation.
Categorization of Expenses on the Bases of Colours
In order to enhance cost control, the expenses are categorized on the bases of colours,
namely red, white and green expenses. The cost controller should segregate the
expenses on the basis of sensitivity of control/force to affect sales and then each
expense should assign specific colour that might be red, white or green. The expenses
in income statement should be categorized on the bases. t, so that one can easily
understand that the nature of expense. This paper is focused on Green Expense
Strategy. First of all, it is necessary to understand these expenses:
i.
Red Expenditures (Forced Expenses)
Belong to the class of expenses that cannot be ignored for the generation of sale. Such
kinds of expenses have strong impact on sales. Mostly fixed expenditures fall under this
category. Variable expenses may also the part of this category.
ii.
White Expenditures (Semi Forced)
Belong to the class of expenses that are neutral to sales. It means that impact factor of
such expenditures on sales is relatively low then red expenses. Such kind of
expenditures can be reduced up-to some extent by taking reasonable measures by cost
controller.
iii.
Green Expenditures (Least Forced/Unforced)
Are the categories of expenditures which can be reduce to significant level, may be
eliminated but most important these can be converted for profits generation. These
expenditures can be cut down from the list of expenditures but also provides an
opportunity to get business in relevant category from market. The word green expense
should not be confused with environmental protection expenses.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Precisely, “Green Expense Management” is a technique by which those expenses are
identified that could be converted into financial benefit for the organization. In order to
implement this technique, firstly expenses are studied in detail; secondly expenses are
categorized whether red, white or green. Third, it is worked out that how much
additional financial and non-financial resources are required to convert these expenses
into profit. Finally, in implementation stage the resources are organized and place
successfully to get financial benefit through green expense strategy.
Process to Identify Green Expenses
•
•
Review all expenses in detail to identify red, white and green expense.
Screen out green expenses in order to make comprehensive study.
•
For each green expense; prepare the feasibility in terms of cost and benefit
analysis.
Financial benefits that could be availed by the Organization and the financial and
non-financial resources required to convert expense to green expense.
After detailed feasibility, the Organization shall list down best green expenses
and ranked in terms of financial benefit.
After successful in house execution of green expense strategy this may e
commercialized.
•
•
•
Limitations
•
•
•
•
Green expense strategy can be mainly implemented in large organizations;
This is not necessary that green expense for particular organization should be
the green expense of others.
The role of cost controller or internal auditor is most important to implement this
technique. Precisely the appointment of one of these is crucial.
Green expenses should be independent to other expenses.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Case Study-COMSATS Institute of Information Technology
In order to implement green expense strategy, COMSATS Institute of Information
Technology is taken as case study. To start up, the snapshot of the Institute is as
follows:
COMSATS Institute of Information Technology (CIIT) started its journey in 1998, and
established its first campus at Islamabad in April 1998. In August 2000, in recognition
of CIIT's achievements, the Federal Government granted it the status of a Degree
Awarding Institute (DAI) through promulgation of its charter. The CIIT, besides its
principal campus at Islamabad, has six other fully functional campuses at Lahore,
Abbottabad, Wah, Attock, Sahiwal and Vehari, while six more campuses at Gujrat,
Kotli, Karachi, Larkana, Quetta, and Peshawar are in the works. The CIIT is also
exploring opportunity for opening an overseas campus in the Gulf region. The CIIT is
now slated for upgradation as a university by the name of „COMSATS University‟
through an Act of the Parliament. For this case study, complete cost structure of CIIT
was observed. Different expenses currently fall under the green expenses strategy
i.e. in house printing facility, repair & maintenance of IT equipment and vehicles, toner
refilling etc.
Objectives of Case Study
COMSATS Institute of Information Technology is a rapidly growing organization from
several years. COMSATS spends millions of rupees on recurring and development of
infrastructure. That is why annual volume of procurement is very huge. The proposal n
order to meet huge consumption the expenses can be managed through centralized in
house facilities. In order to implement green expense strategy the printing expenses are
taken as a part of cased study.
In accumulation, all campuses of COMSATS have to spend millions on printing material
e.g. prospectus, examination sheets, envelopes, writing pads, newsletters etc. The
green expense strategy is implemented by fulfilling printing material needs of
COMSATS campuses through establishment of In-House Centralized Printing Press
facility. In house printing facility can not only save significant financial resources but also
save time involved in buying process. The idea will also impact the revenue generation.
The data for this case study is obtained from currently operated seven campuses of
COMSATS.
Significance of Case Study
Following benefits can be availed through the conversion of printing expense in green
expenses:
•
In house printing facility can assist to save significant amount of financial
resources of CIIT campuses. At present, the annual consumption of printing
material of all campuses is approximately Rs. 25 Million. Due to low production
cost involved in project reasonable amount of money can be saved.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
•
As per Public Procurement Regulatory Authority (PPRA) rules, normally 20-30
days are involved in tender cycle (Tender uploading till delivery). In house
printing facility will save time and ensure timely deliveries.
The vendor‟s charges 3.5% income tax, 16% GST on supplies. The value of tax
is added in the cost of product. Due to the implementation of this project, the
amount of tax can be saved which will ultimately reduce the cost of product up-to
20%.
Sometimes, campuses are not in position to pay-off vendor due to weak liquidity
position. COMSATS Lahore campus will own this project so extended credit
facility may be provided to other campuses. This will enhance the liquidity
position of the campuses.
Minor initial investment/preliminary expenditures are involved in project. The
project can be launched or completed and infrastructure can be developed with
an approx. investment of Rs. 2.985 Million.
One of the major benefits of the project is that it will not only cater the demands
of COMSATS but facilities may be extended to meet the orders of external
parties.
In this context, the rates quoted in tenders will be highly competitive because the
COMSATS is tax free entity and only variable cost will be the part of overall price.
•
•
•
•
•
Legal Status
The project will be launched as the subsidiary of COMSATS and owned by one of the
CIIT campuses. The project will be run by the manager project under the supervision of
committee named as “COMSATS Printing Press Executive Committee (COMPEC). The
purpose of the committee is to manage the administrative, production and distribution
affairs at broad level. The setup of the committee is as follow:
•
•
•
Convener: The person having printing experience and OG-IV (officer Grade)
level.
Secretary : Project Manager
Members : Incharge admissions of all campuses
The committee shall arrange/called General meetings bi annually before one month of
admissions for the supply of printing material to each campus. The manager project will
ensure delivery to each campus on stipulated time as mutually agreed by Executive
Committee. In case of emergency needs extra ordinary meeting can be called.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Organizational Hierarchy
Manager Project
Coordination
Officer
(Production)
Admin &
Accounts Officer
Machine Man
Book Binder
Cutting Operator
Dyer Man
Assistant Admin
(Purchase)
Graphic Designer
Marketing
Manager
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Financial Proposal
i.
Sr. #
Preliminary Development Expenditures:
Description
Op-1
Options of Printing Machines:
Rota: (Single Color), “Alpha” feeder/back feeder with the
production capacity of 30,000 impression in single shift. Max. print
size 12”x17”,
Amount
(Rs.)
450,000
Op-2
Heidel Berg: (Single Color) Max. print size 19”x26”, Production 1,300,000
Capacity 50,000 impressions in single shift.
Op-3
2
3
4
5
6
7
Roland: (Single Color), Max. print size 23”x36”, Production 1,250,000
capacity of 60,000 impression in single shift.
Plate Maker Machine
Paper Cutting Machine
Image Setter
Dye Cutting Machine
Lamination Machine
Furniture: One Executive Set with side table, revolving chair and
two visiting chair, One meeting table with six chairs
200,000
350,000
300,000
350,000
100,000
50,000
Five Office Tables, revolving chair and two visiting chairs with
each office table
75000
Computer & Networking: Five computers (Non-Branded), Core 2
Du, 1.8 Ghz Processor 120 GB HD CD Rom, Ram 512 MB VGA
Card 64 MB Black Dell 15.5" TFT LCD
100,000
Printers 2035 N & 2015
Scanner HP Scanner 3500
One Network cable Coil, Network switch 8 port D-Link, Connector
8
9
Generator Cable for Generator Supply
Miscellaneous: Water Dispenser, Crockery & Stationary etc.
Total (with Op-2)
30,000
3,500
7,000
100,000
20,000
2,985,500
Note: Development Expenditures will be incurred by taking loan from CIIT and will
be reimbursed out of annual profit in first three years.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
ii.
Recurring Expenditure (Monthly Basis)
Salaries (Fixed Salaries)
S. No.
Category
1
2
3
4
5
6
7
8
9
10
Manager Press
Coordination
Officer
(Production)
Admin & Accounts Officer
Marketing Manager
Graphic Designer
Assistant
Admin
Officer
(Purchase)
Machine Man
Book Binder
Cutting Operator
Dyer Man
Total
Scale
Officer/Staff
Grade (OG/SG)
OG-II
OG-I
No’s.
1
1
70,000
30,000
OG-I
OG-I
OG-I
SG-IV
1
1
1
1
30,000
30,000
30,000
20,000
SG-III
SG-II
SG-II
SG-II
2
1
1
1
30,000
12,000
12,000
12,000
276,000
Amount
(Rs.)
Recurring Expenditures
S.
Category
Amount
No.
(Rs.)
1
Electricity
50,000
2
Telephone
3,000
3
Janitorial (One Person)
7,000
4
Courier
20,000
5
Repair & Maintenance of Equipments
50,000
6
Diesel for Generator(Share basis)
50,000
7
Miscellaneous: Entertainment, repair & Maintenance of
20,000
Building &Daily Wages Staff etc.
Total
200,000
Note: Most of the recurring and development may be saved if the resources are
sufficiently available at CIIT campus where the project will be launched.
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Revenue and Expenditure Statement (Annual Basis)
Revenue (Detail Attached)
Less -Expenses
Cost of Production (30% of 25 M)
Recurring Expenditure
Rs. 25.00 M
7.50M
5.71M
13.21 M
11.79 M
Note:
1-Cost of Production: Paper, Ink, Positive and Plates etc.
2- The revenue and income statement is based on the revenue generation from
COMSATS Institute of Information Technology. However, the income from external
orders is not considered at this point of stage.