How to Implement a Cost Control System in Your Business
Assessing your business costs and implementing a cost management system is essential, we look at how you can install one in your business
Although it might be a painstaking process, assessing your business costs and implementing a cost management system is worth it. Smart cost control can bring immediate benefits to your company, as well as lay the foundations for greater efficiency going forward.
But it is important to cut costs wisely – only slashing away here and there will just bring about worse quality and poor morale. Read on for comprehensive information on how to properly introduce a cost control system into your business, and how to avoid some common pitfalls.
What are my first steps in cost control?
Before you look at cost-saving measures, your first step in controlling your overheads is to look carefully at what you’re currently spending.
Start by identifying your ‘cost centres’. Cost centres are the parts of your business that do not produce direct profit but add to the cost of running a company. Cost centres in a typical business might include production, purchasing, financing, sales and marketing, and research and development (R&D)
After you have identified what your cost centres are, find out the types of costs that are in them. In other words, what are you spending money on? This might include the cost of staff, raw materials, utility bills, rent, or IT equipment.
Finally, try to identify costs that might offer easy savings first, and look for significant costs that you can change right now, rather than fixed-rate or ongoing costs (like supply contracts) that might be harder to reduce.
How do I go about controlling costs in my business?
When planning a new project or initiative for your company, you should implement a system for monitoring costs to identify areas where you can make savings. Firstly, you should determine your objectives, for example, you might want to increase your production output or launch in a new region.
After you have done this, establish your ‘standard costs’ for achieving them, standard costs mean how much the project would cost in an ideal world, discounting any unforeseen circumstances. You should also set up ‘budgeted costs’, which would be based on your experience of running a business, taking into account the realities of inefficiency and wastage.
Then record your actual costs, and compare them with your standard and budgeted costs. Costs that turn out to be significantly higher than your budgeted costs are normally easy targets for instant savings. Furthermore, costs that are higher than your standard costs are normally good indicators for how to save in the long term, while lower costs are not always a good sign as they might suggest quality standards are slipping.
Finally, regularly repeat and review this process as benchmarking your processes against other companies in your sector may help with identifying targets for savings.
Who should I involve when cutting costs?
You can involve more people in your cost-cutting process than you might think. For instance you can include your entire business team. Managers they are often responsible for individual ‘cost centres’ within your business so consider delegating management to one particular cost each. Also use employees as your eyes and ears on the ground, they might be able to suggest cost-saving ideas based on their experience. Ask them what they feel is a waste of time or money – and remember that they are more likely to comply with any cost-cutting initiatives if you are clear and open about the whole process.
Cost cutting can also extend beyond you staff to your customers and suppliers. Just asking simple questions can flag up areas for savings you hadn’t considered. Ask your customers which parts of your product or service they don’t use, and your suppliers might be able to put you on a deal better suited to your business.
Furthermore, consider using external consultants as they have specialist knowledge and experience, and can provide a valuable outsider’s viewpoint on where inefficiency exists in your company.
Where are some easy savings opportunities in my business?
Before you dive into micro-managing your budget, remember there may be some costs you can cut with little to no adverse impact on your business. In particular, look for overcharging, unnecessary and excessive costs, and inefficiency.
To avoid overcharging, check your supplier invoices carefully to make sure you’re being billed the correct amount. Look for wrong charges, double billing or missing discounts. With unnecessary losses look for obvious ways to cut down on costs, such as turning the heating and lights off at night or cancelling services you don’t use.
Excessive costs can be reduced by finding alternative and cheaper ways of doing common business processes. For example, using email or second class post instead of first-class, negotiating discounts with suppliers and cracking down on extravagant ‘perks’ of the job like business-class flights (although this last measure needs to be handled carefully).
Inefficiency can also cause significant cost, examples of this might include frequent small orders from suppliers, wasting time and losing bulk discounts, or a manual paper-based system that could be replaced by a PC.
What should I change in order to cut costs?
Sometimes, there will be easy and obvious savings you can make in your business, but often it is cutting costs in the long term that will lead you to real cost-cutting success.
Common areas where most businesses can save costs are:
Staff costs: You could outsource non-essential activities, or invest in new technology to replace resource-heavy manual processes. Another possibility is taking advantage of the flexibility offered by consultants, freelancers, or part-time employees, instead of hiring full-time staff. In addition, you should look at what others in your sector pay their employees to avoid overpaying new recruits. Approach this area with caution, though, as there are numerous dangers.
Purchasing costs: Try and consolidate to as few suppliers to get better discounts on bulk deals, and look for cheaper suppliers more generally as a starting point. Other strategies you could try are forming a buying consortium with local businesses to drive costs down, agreeing long-term or high-volume supply contracts for discounts, and give individual employees purchasing limits to reduce overall costs.
Production costs: Identify where you could use standard rather than individually-designed components to reduce overall costs as a starting point. Also, look at other processes that could be more efficient than the system you’re using, improve quality control to cut wastage rates, and increase production runs.
Finances: If you continually use your overdraft to fund short-term cash requirements for your business, use loans instead. Apply for grants and subsidised loans – a growing number of alternative finance providers will now provide loans and terms the high street banks will not.
Premises: Can some employees work from home to cut costs? Introduce hot-desking to save space, and sub-let spare space. Install energy-saving devices to reduce utility costs, and see if you can save more space or improve efficiency by re-arranging the workplace.
Communications: Email is free, so use it instead of post wherever possible. Look into an alternative phone and broadband deal, and work out whether you’re on the best tariff.
Should I bring in a consultant to help with my cost-cutting?
Whilst they are not necessary in every case, a consultant can prove a valuable asset in the cost- cutting process. They can provide a valuable objective viewpoint into your company, free from vested interests and company culture, and will be able to bring specialist cost-cutting knowledge more generally.
When selecting a consultant, look for a member of a recognised professional standards body – like the Chartered Institute of Purchasing and Supply. Remember to look for evidence of a good track record – see whether they have worked with businesses with similar needs to yours.
When you have identified a consultant, negotiate a contract with them. There are various ways to pay; some charge a percentage calculated on the savings you make, so make sure you know how these savings will be calculated.
Remember to avoid paying up-front where possible, and make the consultant sign a formal confidentiality agreement before they begin the process with you. For more advice on using a consultant, check out our guide here.
What are the business risks involved in cutting costs?
Like tidying a room, once you get going with cutting costs it’s hard to stop. But reducing costs can do more harm than good – quality can suffer and standards will slip, and your ability to meet your business goals could be hampered.
Tread especially carefully around cutting costs related to your staff. If you underpay your employees or reduce the perks of the job, you will find it difficult to attract new talent. More generally, employees may resist your cost-cutting measures and may need extra training. Making staff redundant should only be a nuclear option, as it can damage morale throughout your business as well as potentially land you in front of an employment tribunal.
Remember that employees are not machines, and the ‘ideal’ work performance and efficiency you may have envisaged might not match people’s actual behaviour.
It’s not just staff, though; almost every cost-cutting measure has its drawbacks. For example, depending too heavily on one supplier will disadvantage you hugely if they fail, and cutting training costs might lead to worse performance in the long term. Be aware of such potential downsides when considering whether to reduce any cost.
For more cost cutting tips and general financial planning advice, check out our sister site startups.co.uk’s section here.