Cost control strategies that small business can adopt.
With the ever increasing cost of doing business, there is need for any business that wants to remain competitive in the market place to embark on cost control programme. We have witnessed large companies implementing different cost control strategies lately. I think small businesses have to follow the suit as long as they buy from the same market with the multinational companies. Before I continue, it is important to draw a line between cost control and cost reduction. The two terms sound the same but they are different in meaning. While cost reduction involves cutting costs, cost control is more concerned about the processes than the expenditure item(s). Cost control measures include the strategies which when embarked upon can result in the reduction in the overall costs of the company not just in a short term period but on long term basis. Although the ultimate goal for cost control is cost reduction, for any company to achieve this, it must have explicit cost containment goals built into every aspect of the its activities. Otherwise, the costs will soon creep back to the level before the commencement of a cost containment exercise.
A good cost control measure should help an organisation achieve its goals without undermining the core functional capabilities needed to keep business moving and ultimately, achieve above-market growth. For example, it will be wrong for a company to disengage its performing salesperson in a bid to reduce personnel costs. Of course, the company will be able to reduce its staff costs in the short run but the company may not be able to achieve its revenue target at the end of the year. Furthermore, the company may soon realise the need to recruit another sales person. Before the company can get an experienced salesperson, it should be willing to pay attractive salary. Even if the salary is not higher than what was paid to the previous salesperson, the company will incur recruitment costs. Therefore, cost control is more than cost cutting. It has to be done strategically.
Before any business can succeed in its cost control efforts, it must first understand the nature of its different costs.
Types of Costs
For the purpose of the topic, costs shall be categorised as follows:
- Direct Costs
- Indirect Costs
- Fixed Costs
- Variable Costs
- Controllable Costs
- Uncontrollable Costs
Direct Costs: These are the costs that can be easily and conveniently traced to a project or department e.g. wages
Indirect Costs: Indirect costs are the costs that are not easily traceable to a particular projects or department. These costs must be allocated in order to be assigned to a project e.g. electricity bill.
Fixed Costs: Fixed costs are the costs that usually remain the same even when the activity level changes. One thing about fixed cost is that a business will still incur the cost even when no revenue is earned in a given period e.g. rent.
Variable costs: Variable costs are the costs that change as activity level changes. However, variable cost per unit remains the same over wide range of activity. A good example of variable cost is the cost of raw materials.
Controllable costs: Costs are controllable if the company has the power to determine, or strongly influence the amounts incurred. For example, a company can control how much it spends on telephone bill every month.
Uncontrollable cost: Costs are uncontrollable if the business has no power to influence the amounts incurred e.g. license fee
The reason for the classification of the costs is to help you understand the cost behaviour of your business. With this, you can easily determine the activities that cause such costs to be incurred and that should be your focus if you want to control your costs.
Cost Control Measures
Now that you have a better understanding of your costs, it is easier for you to embark on cost control strategies. Let’s consider few ways by which you can control your costs.
Budgeting and Budgetary Control
You need to draw up budgets for all the sections of your business. The combination of the budgets of all the departments within your business will form the overall budget for the whole company. Remember that your budgets will not only cover the costs you expect to incur, it should also include the expected revenue for the period. From the budget, you should be able to see clearly whether the revenue should be able to cover your costs and still return profits at the end of the year. While preparing the budgets, you can now put your understanding of your cost structure into bear. It is expected that your variable costs should decrease or increase in line with your revenue. If you have too much amount as fixed costs, it may be necessary to seek for ways of reducing the fixed costs so that the burden will not be too much on the business.
Some people usually adopt incremental budgeting whereby they just add a certain percentage to the previous year’s figures. But if actually you want to control costs, I will suggest a zero based budgeting. A zero based budgeting is the type of budgeting where you need to start the budget process from the scratch. Every department must justify every item in the budget. This is the only way you can actually separate the costs that are necessary from those ones that are avoidable. You should endeavour to agree the budgets with members of your company. Once it is approved, it becomes a document that will guide your spending for the year.
Read Also: How To Set Budget on Marketing
However, the fact that a figure or an item is included in the budget does not mean that the amount has to be spent. For example, if your business is not achieving the revenue target set for the year, it is expected that your variable costs or direct costs should reduce too. That is where budgetary control sets in. Before a budget can help in your cost control drive, you should have a reliable system in place for the tracking and monitoring of the expenses. There should be frequent review of all out of line costs/expenses. Possibly, you should impose sanctions for violating or exceeding budgeted expenses. This should apply to all; no sacred cows. At the same time, you should endeavour to reward people that stay within the agreed milestones. This can just be by applauding the persons concerned. This will go a long way in motivating others.
Before you procure any item of significant value, you should source for quotations from two or three suppliers. If it is only one supplier that bids for the supplies of an item, you may not be buying at a fair price. You may not know this until you start getting bids from other suppliers. By the time you compare the quotes, you may discover that you can actually get the same item of the same quality at a cheaper price. The savings you make on one transaction may not be significant. But when you add this up over time, it becomes a huge amount. Don’t forget that it is little drops of water that make a mighty ocean. That is why I say that cost control is more of process than cost cutting.
Perhaps there are things you do in-house which you can outsource especially if they are not your core functions. Examples of these are bookkeeping and tax preparation services. The cost of hiring a competent accountant can be enormous for a small business. Still, every small business needs the services of an accountant. You don’t need to hire an accountant as a full time employee especially when your level of operations cannot support it. Instead, you can outsource to an individual or a firm who will charge you based on the services they render to your business. In most cases, you will discover that what they charge you is just a fraction of what you would have paid if you hired a full time accountant. This is a good way of converting your fixed cost into a variable cost.
In conclusion, you should bear in mind that cost control programmes work well when they are consistent with your company’s vision.