Cost Control & how to exercise it for your business

What is cost control in business? 

Cost control is the process of analysing, identifying and reducing expenses to increase the bottom line. It ensures the best use of company funds, so you get the most out of your money in this era of ever-increasing costs. 

Cost control has always been one of the top priorities for all businesses. But after Covid, its importance grew even more. Now, you must implement foolproof methods to reduce expenses so your company can bear any financial shock that comes your way. 

How does cost control work?

The goal of controlling business costs is to balance the company's present financial health with budget expectations. If the present expenses exceed the budget, you must reduce the project's cost. 

For instance, companies create a direct labour budget to understand how many labour hours are required to complete a single project. They then calculate the cost of paying their employees. If the cost aligns with their budget, they hire employees within the company and pay salaries. If not, they implement cost control by outsourcing the task, as paying a third party is cheaper, and there's more room to negotiate.

You can implement cost control for overall business expenditure or an individual project. To implement cost control, you must first be aware of following pointers:

• Your goal - whether you want to lower the budget for a single project or you want to increase your net income for the quarter/year 
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• The difference between the budgeted costs and actual costs - the larger the difference, the more intensely you should cut costs to match the budget 
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• Where can you afford to cut costs - find ways to reduce expenses such as outsourcing instead of hiring, inventory management or negotiating with vendors  
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• Corrective measures - methods to reduce cost and still create the best possible end product

Clearly defining all these aspects help you identify which costs can be avoided and which cannot be avoided.

What is cost control vs cost management in business? 

Both cost control and cost management are necessary to enhance the profitability of a business. They are often used interchangeably, but they have different meanings in business. Below are the key differences between cost control and cost management:

1. Cost management is more concerned with everything pre-budget including creating the budget for a project, while cost control aims for monitoring and making adjustments in the project's overall costs when they may overshoot the budget. 
2. Cost management considers the full life cycle of a project and estimates the resources required to finish the project, while cost control finds the difference between the estimated budget and actual cost; then, it finds corrective measures to balance both.
3. Cost management is a constant process that goes on continuously throughout the year, while cost control occurs at regular periods or whenever the need arises. 

How can lack of cost control impact your business?

Lack of a robust cost control system, creates a hole in your cash flow and you lose hard earned money. When you don't eliminate unnecessary expenses, you allocate a higher budget for each project, leading to over-expenditure. 

Here's how your business suffers due to lack of cost control measures:

Lower profits 

The company's profit is inversely proportional to the cost. The more you spend, the less the profit will be. Cost control helps you reduce the cost of various projects to increase the bottom line. 

Opportunity cost 

The extra money you spend on each project can be used for better purposes. You can invest that money for higher returns or save the funds for future use. You lose all these opportunities without an efficient cost-control system. 

Lack of extra funds for emergencies

You can never save enough for emergencies —the more, the better. For instance, during Covid, several big corporations lost money. Some of them, like J Crew and J.C. Penney Co., went bankrupt. It’s hard to predict an emergency such as a natural calamity or a pandemic. That's why it's always wise to reduce costs and save extra funds beforehand.

Increased chances of falling into debt

Whether your company makes any profit or not, you must pay fixed business costs like rent, utilities, salaries, insurance and loan payments. If due to any reason you’re short of funds within the company, you must reach out for a loan which leads to debt. A cost control system prevents this scenario as you can use the saved-up money to make payments till your business secures profit again. 

What are different cost control measures?

Now that you know the importance of cost control, it's time you learn how to implement it. Remember that the goal is to cut costs without hampering the quality of your product. Below are some cost control measures for your business:

Manage costs from the beginning of every project 

It's important to estimate all project costs from the beginning to control costs properly. Consider labour and material costs, unexpected issues and machinery costs to determine the total expenditure. It helps you implement corrective measures as soon as you're about to hit the baseline cost. 

For instance, if your estimated cost for a project is $5000 and you realise midway that you're about to hit the cap, implement corrective measures right then to save yourself from overspending. 

Consider different variables in your budget

Consider different variables while budgeting. Suppliers can change prices at the last minute; employees can take leaves or quit. Such changes directly affect your budget. Consider all these variables and account for them in your estimated budget beforehand. 

Negotiate your contracts

Smart businesses don't rely on a single vendor or contractor. Engage with multiple people to negotiate prices and finalise what works best for your business. When you find the right contractors, hold onto them. Long-term contracts from a single contractor open more room for negotiation since the contractors also profit from long-term work. Set up yearly or quarterly contracts with your contractors or come up with a price agreement that suits both. 

Build strong relationships with suppliers

Negotiating only works when you maintain a good relationship with suppliers. When you befriend them, they prioritise you over other buyers regarding the best materials or lower prices. Late payments, arrogant behaviour or other inconveniences can hamper your relationship with the vendor. 

Make strong efforts to clear your invoices on time to build trust among all vendors. For more convenience, use Aspire's integrated payments feature. It lets you schedule invoices and bulk payments to always meet all payment deadlines and keep your vendors happy. Stay informed with real-time notifications when payments are made.

Conduct regular data analysis and reporting

When a project runs smoothly, data analysis takes a back seat. But cost control is all about identifying variances and finding minute ways to save money. Analyse project data constantly to pinpoint any loopholes in the budget so you implement cost control immediately. 

Try a cloud computing management system 

When money is at stake, you must not leave room for human error. Use automation wherever possible. A cloud computing management system saves you time and money by automating your expense management and accounting process. 

Take Aspire, for instance. It has a robust approval system for your budget and spend limits and scheduled billing, so you never have to worry about overspending or missing a bill's due date. It also stores your invoices so you can find all of them in one place. Aspire integrates with your accounting system so you close your books without any hassle. 

Define important KPIs

You need KPIs to measure the cost control process in real-time. They also help in reporting progress in the form of graphs, charts and dashboards. Determine your KPIs and check them throughout the project to monitor expenditure. 

Important KPIs to monitor progress and control costs.

Earned Value (EV)

‍EV monitors and measures the work completed on a project against what was planned to quickly measure if you’re running behind schedule or spending over the budget. EV can further help you measure important metrics such as:.

• Cost Variance (CV): Cost variance is the ratio or difference between planned and actual costs. It shows whether your project's actual costs match or exceed the budget. Formula for schedule variance is Earned Value - Actual cost.
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• Schedule Variance (SV): Schedule variance is the ratio or difference between where your planned your project to be and where your project has reached at a given point in time as per the defined schedule. Formula for schedule variance is Earned Value - Planned value.
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• Schedule Performance Index (SPI): SPI = Earned value/Planned value. When SPI is above 1.00, you’re ahead of schedule. If it’s below 1.00, you’re behind. This measure is similar to SV but is often preferred as it translates the numbers into a value that is easily compared across tasks or projects.
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• Cost Performance Index (CPI): CPI = Earned Value/Actual Cost. When CPI is over 1.00, you’re under budget, and when it’s under 1.00, you’re overspending.

Return on Investment (ROI)

‍ROI shows how much your business benefits from the expenditure. See if your benefits are more, less or equal to the cost. 

Planned work hours vs Actual work hours

‍The salary you pay directly depends on work hours, especially if you've hired contractors. But sometimes a project gets delayed as employees or contractors take sick or vacation leaves. Keep track of work hours to implement corrective measures in case of delays. 

Why is cost control even more important in today's market?

Covid disrupted the financial ecosystem of several companies leading to extreme losses and even bankruptcy in some cases. Natural calamities have majorly contributed to various financial crises over the globe. Losses due to drought amount upto $38.4 billion, and tropical cyclones amount to 3 billion. But it's not the first financial catastrophe and it sure won't be the last. 

There's no telling what comes in the future. It's more than necessary to cut as many costs as possible —without hurting the employees, ofcourse (it goes without saying)—to save your business. Moreover, in a highly competitive market, a business must produce the best product for the least price which is possible only when a business controls its costs. 

Below are the reasons why you must try to reduce the cost of running your business:

To increase the profit 

Your business's profit-making capabilities are directly proportional to your ability to control costs. 

Sales - Fixed Cost - Variable costs = Net income

Since fixed costs are necessary for smooth running of the business, try to reduce your overhead costs as they can hamper overall profit if not monitored correctly. 

For efficient material and labour management 

Inflation is nowhere close to stopping. The cost of common goods and services will only increase. Cost control involves calculating the required capacity of materials, machinery and labour. When you know how much resources are required, you make better hiring and buying decisions. Thus, cost control leads to better use of materials, machinery and labour.

Gives a competitive advantage 

When you cut costs and still manage to maintain the quality of the product, you can reduce its price. It gives you a competitive advantage in the costly market where most customers choose the cheaper product if the quality is mostly the same. Moreover, when you invest the saved money, it builds your reputation in the market for making smart financial choices. It helps you attract more investors. 

Better Credit 

While running a business, you need to take loans for various reasons such as expansion or debt clearance. Good credit helps you land a loan without any hassle. It shows the financial institution that you’re capable of returning the loan without any hassle. To maintain a good credit score, pay back your creditors on time and clear your bank loans before the deadline or sooner. It’s not possible if you're spending money recklessly. An efficient cost control system allows you to save money and use it to clear your loan and debt, so you always maintain a trustworthy credit score. 

Increased budgets 

When you implement a robust cost control system, you save more money. It gives you the opportunity to use this money for the betterment of other departments, such as marketing or sales that may bring the maximum ROI.

How can your business optimise its cost control in the modern era?

As an entrepreneur, you must manage your business expenses and cut certain costs to prevent financial troubles. Implement the four-step cost control process to streamline your cost control system: 

Plan resources

Project managers start the cost control process with resource planning. They determine how much raw material, labour and equipment is needed at each stage of a project. They refer to historical data to make accurate estimations or take feedback from employees who've previously done the job. 

Estimate costs

After considering resources, managers calculate costs for each one of them. They consider fixed, overhead and inflation costs so they can be prepared if the work situation changes or prices increase midway. The goal is to balance the estimated costs with the actual costs. The greater the gap between them, the higher the chance of overspending on a project. 

‍Plan budgets 

After you've estimated the costs, it's time to allocate budgets for each department. By establishing a budget, managers create a baseline cost. With an accurate budget, companies can efficiently forecast their expenditure and implement cost control. 

‍Cut costs 

Cutting costs is all about balancing the estimated budget with the expected expenditure. Suppose you have a four-week project at hand, and it's about to be finished around week three; It means that there will be leftover funds. On the other hand, if the budget runs out during week three, managers have to bring in more funds. With an efficient cost control system, businesses can battle any financial obligations and complete projects without splurging money on unnecessary expenses. 

Automate your expense management for better cost control 

Efficient cost control requires a detailed analysis of the budget. Automation can help make better decisions. Use Aspire to manage your business expenses smartly. It lets you create budgets to prevent you from overspending. 

Aspire also has robust approval policies for your business expenses, so there are fewer chances of any financial error. Manage all your payables effortlessly by scheduling invoices and other bulk payments. Include Aspire in your cost control system to make it foolproof and save thousands of dollars annually.