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Cost control basics

Cost control basics

Do unexpected expenses make you feel like you’re bleeding money in your business? As a small business owner, controlling costs is crucial for your bottom line. But without the resources of a large corporation, it can be challenging to know where to start.

The good news is that businesses can use several simple and effective cost management strategies — like cost control. Cost control involves making sure your expenses don’t exceed your budget so you can keep your cash flow positive and your business thriving.

What is cost control?

Cost control is keeping track of the actual cost of your business expenses, comparing them to your budgeting process, and then cutting costs to increase profits by using specific strategies and solutions.

By controlling your actual costs, you can increase your profitability and ensure that your business or personal finances are sustainable in the long term.

Once you understand how your project’s budget and costs unfold, you can jump in with project management strategies to ensure your business will make your desired profit amount. This could involve saving money on bills, negotiating better prices with suppliers, or eliminating unnecessary expenses.

Using cost control to reach a target income

Your business’s mission is to reach a target income needed to cover all the business expenses and achieve a specific profit margin. But to do this, you might need to change control systems to increase profits by reducing actual costs or increasing sales. 

Let’s say you have a floor installation company that makes $12,000 in monthly profit, but you want that number to be $15,000 monthly. This $15,000 goal is your target net income. 

You can use the formula for target net income to identify what changes you could make to hit your goal and the resources needed to complete your mission:

Target net income = Sales - Fixed costs - Variable costs

Variable costs are one influence on your expenses that are challenging to control. Your business’s variable expenses are the things that fluctuate, like raw materials, production supplies, marketing, utilities, and sales commissions. As your activities and sales increase, your variable costs increase. Decreasing your variable costs restricts your ability to perform those activities and maintain those sales. 

Say the business makes $20,000 in sales revenue and spends $5,000 on fixed costs and $3,000 on variable expenses. That gives you a $12,000 net income. You buy cheaper raw materials to reach your target net income of $15,000, saving $1,000 in direct costs: things like your project expenses.

Now your formula looks like this:

$13,000 = $20,000 - $5,000 - $2,000

After the significant cost savings from your cheaper materials, you’re closer to your $15,000 profit goal, but you still have a ways to go, so you look at your fixed costs.

Fixed costs don’t go with the flow of your business operations. They are the costs you pay no matter how much you produce, like rent and salaried employees.

You might ask your landlord to reduce your rent by $500 every month. Now your net income is up to $13,500

Next, you decide to invest in marketing to boost your sales. You pay $1,000 for marketing costs, increasing your fixed costs by $1,000. Fortunately, the marketing campaign was a hit. Your sales jump by $3,000, increasing your sales revenue to $23,000, which means you’ve exceeded your goal by $500!

Let’s look at the numbers:

$15,500 = $23,000 - $4,500 - $3,000

While this is excellent news for your floor installation company, what if your business isn’t achieving your profit goals? That’s where cost control strategies come in. 

Four cost control strategies your business can use

When you know the accurate budgeted cost and how to control costs, you can implement the most appropriate strategies, reduce expenses, and hit your profit targets.

Not only that, but your business will also have more money to invest in future projects and growth. There’s a lot to gain, so let’s look at what you can do to control costs.

Cost control method #1: Optimize workforce

If you can outsource tasks like accounting or IT management to a third party, your business will free up your internal team to work on high-level work. Another option is to scale back on staff if you’re not profiting from them or hire more if a new employee increases sales.

Cost control method #2: Automate tasks

Where can your business leverage technology to automate tasks? Adopting AP automation software to handle manual tasks also frees up your internal resources and helps with cost control. 

Cost control method #3: Lean project management

This approach to cost management involves identifying and managing costs by eliminating waste in business operations, such as excess inventory, unnecessary paperwork, or inefficient processes.

A great way to start is to reduce inventory waste, such as ordering product supplies in smaller batches, offering customers discounts to move old inventory, and using a more efficient system to track inventory. 

Cost control method #4: Review services and purchasing

One of the best cost management strategies is to renegotiate for better terms. If you have good relationships with your suppliers and service vendors, they might be willing to offer you lower prices. This lets you cut costs without impacting production.

Corporate cost control tips

Cost control is a valuable tool for project success, but you want to maximize your cost accounting efforts and focus on increasing profits and reducing project costs.

  • Don’t cut back too much: If you scale back on labor and then your production dips, you’ll have to spend more money re-hiring new employees to increase production again. (The average cost to hire a new employee is $4,129.)
  • Think short and long-term: If your cost control efforts only give you a short-term profit boost but reduce your business capital in the long run, they might not be worthwhile. 
  • Create a cost control system: Controlling costs is an ongoing process rather than a once-in-a-while solution to boost profits and avoid cost overruns. Transition to a system that can help streamline your expense tracking and budgeting. 

With the right software, you can track expenses, compare actual costs incurred to your estimated costs, and control your costs. Even better, with a comprehensive tool, you’ll have the data visibility to make smarter decisions about strategies to boost profits. 

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