People often assume that cost control is a measure that applies only to established businesses. Or, cost control reduces companies’ outflow to improve financial performance. Although this may be partially true, the best results come when viewing it as a global, consistent, and long-term strategy.
If you are in the process of starting a business, then cost control is a subject worth researching. Below, is a starter guide for the concept of cost control. It contains useful advice on best practices for integrating good cost control methods into your new business venture.
Defining Cost Control
Cost control is something that businesses perform when they are underperforming or struggling. It is a way of taking control of and moving their finances into the black. This means that, for many companies, cost control is really cost-cutting. The reason that businesses tend to talk about “controlling costs” rather than “cutting costs” is, simply put, a PR spin. Cost control sounds better than cost-cutting, even when using the two terms interchangeably.
True cost control is very different from cost-cutting. In fact, it is a measure that a company can put in place to avoid cost-cutting altogether. The best way to exemplify this difference is as follows:
- Cost-cutting is a reactive measure. This is how businesses respond to adverse financial circumstances. Or, the businesses use this method when they wish to generate higher revenues.
- Cost control is a proactive measure. This is how businesses ensure they can fully control their overall costs. Cost control helps businesses protect their financial outlook and ensure its financial stability. When done well, cost control should mean that cost-cutting is unnecessary. The expenses and costs never increase to a point where they become problematic for the business.
The Problems Of The Practice Of Cost Control
In theory, cost control is essentially a form of continuous monitoring of the outgoings of a business. To use a colloquial term, it means keeping a firm grip on the purse strings at all times. While in this process, the business is always assessing whether a cost is justifiable and necessary.
In practice, this can be somewhat more challenging. Especially when faced with modern business theories like “you have to spend money to make money”. Cost control means you have to be parsimonious. However, you should not become so frugal that you harm your business’ opportunities to grow and develop. This is an extremely fine line that even the most established entrepreneurs can struggle to walk.
Good Cost Control Principles
In many ways, cost control is something that all businesses have to develop for themselves. They must keep it relevant to their own specific industry and their priorities in business. However, there are a few principles that are applicable to most businesses. We will discuss these principles in further detail below.
Costs Too Small For Cost Control?
Having small costs are a basic point often overlooked by new entrepreneurs. When people talk about business costs, they tend to talk about big expenses. For example:
- Rent and utility costs
- Advertising costs
- Staff costs
- IT costs…
- … and so on
All of these areas should be subject to cost control measures. However, they are far from the only costs that can be controlled. An old phrase is helpful for understanding the power of cost control: “take care of the pennies, and the pounds will take care of themselves”. This is a handy way of looking at cost control. By ensuring that you examine every penny you spend, you are more likely to achieve optimal cost control.
In other words, you should also scrutinise your smaller expected costs. Also, look for opportunities for potential savings. The following areas are particularly important to consider:
- The cost of office supplies, such as paper, pens, and related materials are small but can add up over time. Ensure you’re paying the best possible price to keep this cost reasonable.
- Similarly, the cost of printing materials and ink is an unavoidable business expense. It is, however, one that can be somewhat mitigated by looking for discounted inks and toners wherever possible.
- The cost of staff expenses and petty cash can also spiral if left unmonitored. So, set firm limits and monitor usage to ensure correct control over this expenditure.
- Finally, the cost of decor is also an area where many businesses tend to spend more than expected. This is particularly pertinent for new entrepreneurs who are establishing a start-up business. While some decorative touches are essential in a work environment, look for cost-efficient choices wherever possible. For example, printing your own artwork can keep the costs at a reasonable level.
This principle is, at its core, very simple. It seeks to encourage entrepreneurs to focus only on the costs that they can control. Some costs (such as the prices set by your suppliers) are beyond your control. In these cases, you have to find a way to work within the parameters set by others. Good cost control means that sometimes, you’ll have to accept that you cannot control certain costs. So, you learn how to work to manage your budget to accommodate it.
Finally, a simple point worth keeping in mind if you intend to start a business. Before spending money, ask yourself how you would justify the expenditure to a businessperson you respect. Also, imagine a genuinely tough conversation that demands an explanation of the necessity of certain costs. You may have to explain how you determined what was acceptable to spend to a skeptical audience. If you can justify the costs under these imagined circumstances, then you are almost certainly practising good cost control. If the arguments are not successful, then you need to run the numbers again until they justify the expenditure.
If you constantly evaluate every area of expenditure, then optimal cost control becomes possible. This not only boosts the potential for a successful, profitable business but also helps to ensure you will not need to practice extreme cost-cutting measures in the future. Good luck!