Imagine this: You're running a very profitable book-binding business. Orders are pouring in, each employee is working effectively, customers are satisfied, accounts are well-balanced, and you're making great profits. Everything is running smoothly, but suddenly a global pandemic brings everyday life to a standstill.
All your business activities are force-stopped, and you and your employees are quarantined at home because of a government-imposed lockdown. Schools and libraries are shut down as well, bringing you no orders for a long time.
Somehow you manage to run a tight ship and sustain yourselves and your employees through the tough time. In the yearlong lockdown, you have eaten through all your savings, and now slowly, businesses are allowed to resume operation.
You are back in business, but the orders are creeping in at an extremely slow pace. So, what do you do to support yourselves and your business? The answer is straightforward: cost control.
What you just imagined right now was the harsh reality of millions of business owners around the globe during the global pandemic of COVID-19. If not for the art of cost control, a lot of businesses would have been doomed by now.
Yes, you read it right. Cost control is an art that you learn with time and practice. You can use cost control interchangeably with cost management because both aspects are an important part of a successful business.
However, keep in mind that cost control does not mean compromising the quality of your product/service and providing your customers with a below-average experience.
If you're a new business owner and experiencing declined profitability or simply looking for ways to save money effectively, you're at the right place. In this specially curated article for you, we will be discussing cost control in detail and how you can implement it efficiently.
Let's start with the basics.
Cost control refers to various actions and procedures a business or organization implements to decrease its direct cost and increase profitability.
Often companies hire finance experts and professionals to monitor cost management and improve financial performance.
Now, hiring and paying a financial expert might seem to be an activity that goes against the idea of cost-cutting, but it proves to be highly beneficial in the long run.
This is how all financial cost control decisions are made. The focus is not just on short-term results but also long-term and more sustainable results.
For instance, say you're running a café and looking for cost control methods. After some analysis, you realize you are spending more than budgeted on your inventory storage.
A café stores a lot of items like cutlery, extra coffee machine apparatuses, food items, cleaning equipment, etc. Now, how can you save money on storage? Here are some probable solutions.
Now that you know what cost control is, you must also know the different kinds of costs a business or a company faces. Each cost has different cost control and management techniques.
There are four major types of business costs:
Direct cost is the cost of raw materials required to make your product. For instance, for a fish aquarium shop, the raw material required is aquarium glass, silicone, fishes, etc.
All the money spent on acquiring the raw material is referred to as direct costs. It is very difficult to do cost management when it comes to direct costs, as this might compromise the quality of your product/service.
Indirect costs refer to the costs not directly related to the raw material, falling into the category of overhead charges. For a fish aquarium shop, the overhead charges can be the decorative items used to put inside the aquarium, like artificial plants, plastic toys, etc.
Indirect costs can be easily minimized as they won’t directly affect the line of production. Usually, indirect costs are expenditures that set your business apart from other competitors in the market.
Fixed cost is the money spent monthly on rentals, electricity bills, water bills, etc. Usually, companies and businesses focus on signing long-term contracts when it comes to fixed costs to save money.
Variable costs refer to money spent on unforeseeable circumstances and conditions. For instance, when an air conditioner breaks down, a service person must be called, who will then charge you money after fixing the air conditioner. This is a cost that cannot be avoided.
However, variable costs highly fluctuate. Sometimes a business can face a lot of variable costs in a month or none at all.
Strategic cost control and management can allow you to increase your cost margins effectively and efficiently. However, as we mentioned before, cost control should not reduce the quality of your product. In the market, the competition is tough, and it takes very little for customers to change brands and companies.
Additionally, there is a probability that your employees might also not like the cost control techniques. Unhappy employees can affect the business adversely.
Hence, make sure you run all your cost management plans through your employees first for their willing participation. Secondly, ensure the cost control does not affect them directly or indirectly.
After knowing the risk associated with cost control, here are some crucial benefits of cost management:
Cost management techniques often make businesses and companies follow a strict budget. Through this, variable costs and indirect costs can be greatly controlled.
Additionally, sometimes staying on a budget motivates the company and team members to bring in more projects and finish them before the deadline.
We are now living in a digitally advanced world. Because of this, we sometimes end up automating tasks that could have been very easily done manually.
Companies unknowingly end up spending more than necessary on technology like time scheduling, alerting and notifications, multiple customer service software, etc.
These technologies have proven to be beneficial, but in the case of cost control situations, their tasks can easily be done manually.
If your business or company has some debts to clear, cost control is a great way to do that. Through budgeting, you are minimizing your indirect and variable costs.
The saved money can be used to finish off the loans and reinvest in the business when the right time comes.
Numerous factors in a business can help you determine your costs. Some important factors you must keep in mind while dealing with cost control and cost management are:
Mentioned here are five tried and tested cost control methods that will surely turn out to be effective if implemented properly:
One of the most effective and efficient methods for cost control is monitoring all your expenses through a variety of checkpoints or checklists. This ensures that the company is not indulging in unnecessary expenditures and following the budget strictly.
This can be done by creating a detailed checklist. Each time the company makes a purchasing decision, it must be evaluated through the checklist to confirm its importance and need.
For instance, if your production team demands additional equipment to automate a workflow further, you can make a calculated decision. You can evaluate whether additional equipment would be cheaper or if you can hire additional manual labor to help with the same task.
If you miss certain points while making the decision, the checklist will remind you of it. Hence, it is important to update the checklist periodically. You can also have a professional financial advisor verify the checklist for its credibility and efficiency.
Almost all companies have been in situations where a project had to be pushed because of a missed deadline. It is important to note each time a deadline is missed, more resources are invested in it knowingly and unknowingly. Therefore, when it comes to cost control, all deadlines must be strictly adhered to.
Net income for any business is simply calculated by subtracting all your costs from sales profit.
Once businesses have been up and running for long durations, even after not reaching net income, they can run in profit. However, if you are looking to cost control, then make it mandatory for your business to meet the net income criterion.
For this, you will have to make decisions depending on the situation. Sometimes you will have to attempt to reduce your fixed costs or variable costs. You can also try to minimize situations that give rise to indirect and variable costs.
Companies spend a lot knowingly and unknowingly on supervising department activities.
According to Harvard Business Review, departments with more than 20 employees spend around 20% of the total allocated budget on supervising department employees.
If your company is looking to cost control, it becomes excessively important to eliminate department management costs. Now you must be wondering how you can do this. This can be done by retaining employees who are highly competent and confident enough to handle department activities independently.
However, this might include training your employees in a particular way from the beginning. They should be able to differentiate between situations in which they need supervisor supports from situations they don’t.
Gone are the days of newspaper and television advertising. We are living in a digitally enhanced world, and almost everyone, irrespective of age, gender, and class, owns a smartphone now.
Invest in more fruitful and cheaper advertising techniques like social media marketing, influencer marketing, email marketing, SEO marketing, customer loyalty programs, etc.
You might need some time to establish these advertising techniques and start reaping benefits, but they prove to be highly successful.
You do not necessarily need professional social media marketing help to start. You can kickstart it yourself through some research and reading. There is a plethora of free resources available online which can be helpful for you.
Once you adopt these innovative marketing strategies, you will surely see a reduction in your marketing budget.
To make it easier for you to understand, we have broken down the overall cost control process into a step-by-step process. You can make tweaks and changes to each step as you see fit and according to the needs and requirements of your business.
Step 1 – Determine who and which department will be responsible for cost control and management.
Step 2 – Make the cost management department more centralized and systematic.
Step 3 – Produce and collect relevant data and records to properly research the expenditures of the company/business.
Step 4 – Tally all the past accounting and financial data keeping in mind factors like fixed costs, variable costs, controlling costs, profit margins, etc.
Step 5 – Set up a budget line for each department.
Step 6 – Explain to the head of each department how the budget line must be followed.
Step 7 – Create a separate expense checklist for each department.
Step 8 – Prepare one common expense checklist for the company as well.
Step 9 – Regularly monitor each department's budget line and expense checklist.
Step 10 – Side by side, implement other cost control measures like social media marketing, eliminating unnecessary workflow automation, employee cuts, etc.
Cost control is largely a trial-and-error method that needs proper research, planning, coordination, and implementation. Don't lose hope if the methods you thought might work fail or do not give desirable results.
If you need help, you can always ask for it. You can also invest in a financial management service. It might seem to be a big investment initially, but it will be highly beneficial in the long run. You can also opt for expense management services if not a financial management professional.
Hubler is one such solution offering great expense management software. It can adapt to all your business needs and deliver highly effective and efficient cost-control techniques.
The various tools and features like approval flows, auto sync expenses, report subscriptions, in-depth analysis, customizable budget designing, etc., will allow you to have a much better handle on your expenses.
Additionally, the software is extremely user-friendly. As you read this, Hubler is being used by more than 100 trusted customers and partners.
Check out Hubler and get in touch with our expert team to get started.