5 Ways to Control Costs
Cost control in business
Costs are often a silent killer of business. While revenue and sales are essential for any enterprise, expenses are just as important for profit. Costs are also far easier to control than revenue, making them a prime target for any business wishing to improve its finances quickly. Here are five ways to get expenses low, and keep them low.
1. Cost and benefit analysis
Appraisal of the costs and benefits of any new decision is an invaluable tool at your disposal. To perform an effective analysis, you need as much information as possible on the decision. Any pertinent numbers that are not available should be estimated as realistically as possible.
Comparing the likely expenses and revenues that will accrue from a new investment, purchase, hire or other major decision shows you the potential effect on profit as well as cash flow. There is some research involved, but once the estimates have been established, cost-benefit analysis is relatively straightforward. Simply compare the total expenses and total revenues, and make the final decision. To estimate costs and revenues, you can use past experience, quotes from vendors, any information available from competitors, or projections based on existing trends and patterns.
For instance, if you are considering replacing your computer system with more modern state-of-the-art computers, you can estimate the cost of purchasing and installing the new machines, as well as the value of time lost while workers are trained or get accustomed to the new equipment. There might be an expense for training employees in the new system as well.
On the positive side, you would consider what tasks the new computer system will speed up, if you will be able to produce more products more quickly, any gains to internal or external communication which may translate into more sales or better customer service, and any improvements to employee satisfaction. In addition, if you can sell off the old equipment, this is added to the positive side of the ledger. If the benefits outweigh the costs, you should go ahead and make the purchase.
2. Spending analysis
You should regularly and frequently analyze your business' spending patterns. In the course of running your business, it is very easy for unnecessary or inefficient costs to sneak in. Each of these costs is likely to be small and not very noticeable. But taken together, they may be costing you large amounts over time, shaving percentage points off profit.
If I offered you $1,200 every December 31st, you would probably take it. Saving an extra $100 per month (which is just $25 per week) will have the same effect. Small changes add up over time, and they require very little effort. Surveying the money habits on a regular basis keeps you aware of the company's activities in general, providing a broader overview than what you encounter in the day-to-day milieu of managing things. You can critically evaluate all of your spending on a weekly or monthly basis.
3. Keeping better records
You can't analyze your records of spending and revenue if you don't have records to analyze. Make an effort to improve your bookkeeping and accounting practices and keep well-organized and up-to-date records. Needless to say, this has many benefits beyond cost control. An effective accounting system will include not just raw data, but a variety of formulas, visuals and indicators that provide information on how your financial situation is changing over time.
4. Getting more engaged with vendors
Your vendors and suppliers can be seen as enemies or potential opportunities for cost control. They may have discounts, payment plans or special offers available that you are not aware of. They may have little incentive to tell you about special deals. Oftentimes suppliers are happy to cut your prices if they can be confident you will provide regular business. Regular income from a predictable source over time is often more valuable than irregular large purchases. That's because these smaller, more regular purchases ensure cash flow over the long term, which is often more important.
Consider your strategic situation. If you are satisfied with your suppliers' products, and will probably have a consistent need for them going forward, it behooves you to engage more closely with them and cultivate a positive working relationship. The cost savings over time can be massive.
5. Suggestions from inside the organization
The people closest to any process usually have the most information about it. Keep an open door to suggestions and comments from across the organization on how to make things more efficient and cost-effective. Incentivize and reward individuals for constructive suggestions. Keep lines of communication open, especially with department heads and other high-ranking individuals. If your company is very small, it will be even easier to hear everyone's feedback on a regular basis. As long as you maintain order and control, remaining aware of what is on people's minds will often reveal simple yet powerful insights that will greatly help to control costs.
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