A cost structure review is one of the most valuable exercises a business owner can undertake — and one of the least commonly done.

Most NZ business owners have a general sense of their major costs. Very few have a clear, structured picture of their entire cost base: what every cost is, what it does for the business, how it compares to industry benchmarks, and whether it is proportionate to the revenue it supports.

This guide walks through how to do a cost structure review — step by step, without needing an accountant or specialist software.

What Is a Cost Structure Review?

A cost structure review is a systematic analysis of every cost in your business. The goal is to understand:

• What you are spending money on
• Whether each cost is direct (variable with revenue) or indirect (overhead)
• Whether each cost is necessary, appropriately sized, and generating value
• How your cost structure compares to industry benchmarks
• Where the highest-priority opportunities for improvement are

It is not a cost-cutting exercise. It is a diagnostic exercise. The output is a clear picture of your cost base and a prioritised list of opportunities — some of which may be cost reductions, some of which may be cost reallocations, and some of which may be investments that reduce costs elsewhere.

Step 1: Gather Your Financial Data

You need at least 12 months of financial data. Ideally, use two to three years to identify trends rather than snapshots.

The most useful source is your profit and loss statement, broken down by cost category. If your accounting software allows it, export a monthly P&L for the past 12–24 months. This lets you see seasonal patterns and trends that an annual summary obscures.

If your accounts are not detailed enough — if costs are grouped into broad categories that do not tell you much — you may need to go back to the source transactions. Most accounting software allows you to drill down from a category total to the individual transactions that make it up.

Step 2: Separate Direct Costs from Overhead

For every cost line, ask: does this cost vary directly with the amount of work we do, or does it exist regardless of activity level?

Direct costs (also called variable costs or cost of goods sold) include:

• Raw materials and stock
• Direct labour — the people doing the work
• Subcontractor costs
• Any other costs that are incurred specifically to deliver a job or product

Overhead costs (also called indirect costs or fixed costs) include:

• Rent and premises
• Management and administration salaries
• Vehicle costs
• Software and technology
• Insurance
• Professional fees
• Marketing and advertising
• Finance costs

Some costs are partially direct and partially overhead — for example, a vehicle used partly for job delivery and partly for management travel. These need to be split proportionally.

Once you have separated direct costs from overhead, calculate your gross margin (revenue minus direct costs, divided by revenue). This is your starting benchmark.

Step 3: Benchmark Against Industry Standards

Your gross margin and overhead ratio mean different things depending on your industry. A 35% gross margin is healthy for a trades business but thin for a professional services firm. An overhead ratio of 25% of revenue is lean for a manufacturer but high for a sole-trader consultant.

Find industry benchmarks for your sector. Sources include:

• Your industry association (many publish annual benchmarking surveys)
• Your accountant (a good accountant will know the typical ratios for your sector)
• The IRD's industry benchmarking tool, which provides average cost ratios for many NZ industries
• Published research from business advisory firms

Compare your gross margin and overhead ratio to the benchmark. If you are significantly below benchmark on gross margin, you have a pricing or direct cost problem. If your overhead ratio is significantly above benchmark, you have an overhead problem.

Step 4: Analyse Each Overhead Category

For each overhead category, ask four questions:

Is this cost necessary? Some overhead costs are legally required (insurance, compliance), operationally essential (premises, core staff), or strategically important (marketing, key relationships). Others are legacy costs that have accumulated over time without being reviewed.

Is this cost appropriately sized? Even necessary costs can be too large. Premises that are bigger than needed, a vehicle fleet that exceeds utilisation, software licences for more users than are active. The question is not just whether the cost exists but whether it is the right size.

When was this cost last reviewed? Costs that have not been reviewed or renegotiated in the past two to three years are candidates for attention. Supplier relationships drift. Market rates change. What was competitive three years ago may not be now.

What would happen if this cost were reduced or eliminated? For each cost, think through the consequences of reducing it by 20% or eliminating it entirely. Some costs have obvious consequences; others may have less impact than assumed.

Step 5: Analyse Direct Costs

Direct cost analysis requires a different approach because these costs are tied to specific jobs, products, or service lines.

The key question is: are your direct costs consistent with your pricing? If you are quoting jobs at a 40% gross margin but achieving 32% on average, your direct costs are higher than your estimates — which means either your estimates are wrong or your costs are out of control.

For each major category of direct cost, ask:

• Are we buying at competitive prices?
• Are we using materials efficiently, or is there significant waste?
• Are our labour rates accurate (including all on-costs)?
• Are subcontractor costs being managed and benchmarked?
• Are we tracking actual costs against estimates for each job?

If you are not doing job costing — tracking actual costs against estimates for each job — this is the most important gap to close. See our job costing guide for how to start.

Step 6: Prioritise Opportunities

By this point, you should have a list of cost categories that are out of line with benchmarks, have not been reviewed recently, or are larger than they need to be.

Prioritise these by two dimensions: the potential saving (how much could you realistically reduce this cost?) and the ease of implementation (how hard is it to make the change?).

High potential saving + easy to implement: do these first. Unused subscriptions, supplier renegotiations, and minor overhead reductions typically fall here.

High potential saving + harder to implement: plan these carefully. Premises changes, headcount restructuring, and major procurement changes take time and need to be managed well.

Low potential saving: deprioritise unless they are genuinely easy.

Step 7: Implement and Track

A cost structure review is only valuable if it leads to action. For each priority opportunity, define:

• What specifically will change
• Who is responsible for making the change
• By when
• How the saving will be tracked

Review your cost structure quarterly. Costs drift over time — new subscriptions accumulate, supplier prices increase, headcount grows. A quarterly review keeps the picture current and prevents the gradual erosion of margins that happens when costs are not actively managed.

When to Get an Independent Review

A self-directed cost structure review is valuable. An independent review is more valuable — because it brings an outside perspective, industry benchmarks, and the ability to ask questions that are hard to ask from inside the business.

A Business Profitability Review covers the full cost structure analysis described above, plus margin analysis by product or service line, pricing assessment, and a prioritised set of recommendations. It is a structured engagement, not a one-off conversation.

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Ridgeline Advisory is a Christchurch-based business advisory firm helping NZ business owners improve profit, reduce costs and plan succession and exit.

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