Business Finance Consulting

Tips for Effective Cost Control

Two words that individually do not usually enthuse the masses… Very few people get inspiration from the two words put together.

‘Cost Control’ can be described as the activity of controlling costs within a process, within a project, department, division or company.

Cost Control needs to be carefully managed: Yes reducing costs is the quickest and easiest way to improve profits (every $ saved is a $ more in profits), but indiscriminate cost cutting can lead to reduced efficiencies, falling quality and poor morale.

Cost Control typically includes:
• Accurate classification and measurement;
• Analysis of variances of actual costs versus budget (sometimes also versus the previous year) and their relevance;
• Determination of the causes for variances;
• Corrective actions to adjust the budget, bringing the actual in line with budget, or a combination of both.

While a small business will look at the total company costs, a larger business will be organised by departments, cost centres and will trace the costs as such: Cost of Sales, Sales & Marketing, Research & Development and Finance & Administration.

Each of these different Departments or Activities of the company will have purchasing costs, personnel costs, equipment costs, utilities costs, etc.

Ways to reduce the purchasing and productions costs:
• Guarantee minimum quantities commitment, against lower prices;
• Try to negotiate long-term purchasing contracts, against lower prices;
• Look for a cheaper supplier with the same level of quality;
• Match the quality level of your purchases with the quality of your own outputs (You may not need a 10 year guaranteed component to go into your 3 year guaranteed products);
• Improve processes to reduce wastage of materials and energy;
• Improve inward quality control to reduce rejects and reworking costs;
• If importing, consider putting two banks in competition for the purchase of overseas currencies.

Ways to reduce personnel expenses:
• Consider part-time employees, instead of full-time employees;
• Consider outsourcing some activities such as payroll, accounting;
• Consider possible automation of tasks and processes;
• Consider increasing the variable part of employee remuneration, based on performance, instead of a base salary increase.

Ways to improve cash flow and reduce finance costs:
• Optimise inventory/stock control to reduce unnecessary purchases;
• Get rid of obsolete stock to reduce unnecessary storage space;
• Implement proper collection follow up and procedures;
• Negotiate longer payment terms with suppliers;
• Consolidate several financing facilities into one;
• Make sure you do not finance your business on credit card interest rate;
• Look at possible grants and subsidies.

Ways to improve on utility costs:
• Make sure all equipment, computers and electricity consuming devices are switched off at night and during week ends;
• The same goes with switching off heating systems at night and weekends;
• Every two years, put your utility supplier in competition with other suppliers.

Ways to improve on other costs such as communication, telecommunication and travel & entertainment:
• Use teleconference and email communication instead of travelling;
• Use a company intranet to reduce duplication of information and manuals;
• Every two years, put your telecommunication provider in competition with other suppliers and new technology.

So, who is responsible for cost control?
Effective cost cutting involves everybody in the business, starting from the top and going down the organisation chart. The head (Managing Director/Business Owner) is the one setting the objectives to be achieved.

As a conclusion, cost control is about monitoring the costs and making sure they are what they should be in order to achieve your objectives.