How To Control Cost In Business?
In the current climate of inflation every company owner and director must urgently look at business cost control as a means of improving profitability and preserving cash. In this article we examine how to control cost in business.
Prepare a budget
The important first step in business cost control is to create a budget. This involves reviewing historical sales & costs and creating a forecast of what you expect these figures to be each month in future. Present the figures like a profit and loss report over a minimum of 12 months but ideally over 3 – 5 years. The budget will provide a very helpful financial view of the future to improve strategic decision-making. But it will also serve two key purposes essential to cost control:
- It creates an opportunity to examine costs;
- It provides a target to compare actual performance against budget to highlight over-spending.
Examining Costs
Every business should regularly examine its costs to ensure money is not being wasted. We often find businesses are paying for things they don’t really need or no longer use across a range of categories including premises, IT, marketing, insurance, finance and general admin. Export costs from your accounting system into a spreadsheet so they can easily be analysed. Compare trends and highlight areas of rising cost. It’s important to recognise that there are two types of cost: Direct costs and Overhead costs.
Direct vs Overhead Costs
Direct and overhead costs should be approached separately. Direct costs vary with activity and are the ingredients for the services and products you sell. Overheads are the costs associated with keeping your business running and tend to remain relatively static despite changes in activity.
Direct Costs
Direct costs can be controlled both absolutely and through improved efficiency. You should target both. Common ways to control direct costs absolutely include renegotiating with suppliers, buying in more cost-effective volumes, switching to an alternative product or service, or changing supplier. The latter gives the opportunity to put several suppliers in competition with one another to make sure you’re getting the best value. Inefficiency can be a hidden cost to your business. Waste can occur in many forms including:
- Poor productivity
- Sub-optimal / manual processes
- Unproductive or unmanaged staff
- Poor quality resulting in re-work
- Inefficient use of materials
- Poor planning and scheduling
You should regularly review your processes to improve quality & efficiency and to design waste out. Reducing direct costs improves your gross margin which is a key business performance indicator. By achieving this every pound of revenue contributes more to your bottom line and allows you to grow profitably. We find that most businesses have improvements that can be made here.
Overhead Costs
Overhead costs can be controlled by close examination and questioning. List all your outgoings and scrutinise them in the cold light of day. Ask yourself questions like, “do we need this?” and “is this out of date?” Similar to direct costs, renegotiating or switching product, service or supplier can improve value. As your sales increase keep a close eye on your overheads to ensure they don’t grow unnecessarily. This way you’ll achieve better economies of scale resulting in improved profits.
Achieving Best Value
Finally, when considering your expenditure it’s best to think about value, rather than cost as price is not the only determining factor. You should also consider other factors surrounding the product or service including quality, reliability, consistency, availability, warrantee and other add-ons that are sometimes hidden like delivery charges. When it comes to what you pay your team you need to consider their experience and the costs & impact associated with losing key staff. When hiring, make sure you are competitive to ensure you attract the most suitable candidates.
Expert Financial Support
Independent help can make a significant difference with cost control initiatives providing you with a more objective and effective outcome. Secantor’s Outsourced Finance Directors have a wealth of experience and expertise in helping SME businesses to optimise finances, including finding ways to improve profitability through better cost control. Our services are on-demand so you decide how much support you need. This makes for a very cost-effective way to improve your finances. Why not book a call with one of our experts to find out how you could benefit.
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