Cost avoidance vs cost savings
The easiest difference to spot between cost saving and cost avoidance is that cost saving is a reactive measure, while cost avoidance is a proactive decision.
Cost savings refer to the reduction in your immediate expenses, whether due to negotiation or other cost saving initiative. If a vendor was selling 500 units of laptops at SGD $3,000 each in the first year, and you negotiate the next year to sell them at SGD $2,800 each, then that difference is hard savings clearly visible in your accounting and profit and loss (P&L) statements.
Cost avoidance, by contrast, means anticipating future costs and preventing them from happening with proactive steps. If you are locking in a fixed price for a consignment that you’ll need for the next few years, knowing that the vendor will increase the cost every year, you’re avoiding future costs that will never occur on your P&L statement. Proper documentation is necessary to prove the impact of your cost avoiding strategies, as it isn’t as visible on the statement as cost saving strategies.
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The key here is identifying the redundant or bad costs to cut so you can keep a consistent quality or fund the good ones better. These could be a redundant position, an underused machine, or a store branch that isn’t bringing the average minimum profits.
Formulae to calculate cost savings and cost avoidance
Both cost savings and cost avoidance appear differently in your account statements. Where you can easily trace a cost saving effort in your audit, proving the cost avoidance impact needs proper documentation.
- To calculate cost savings, follow the formula below
Cost Savings = Baseline Cost − New Cost − Implementation Cost
If you have renegotiated the price of 100 laptops to SGD $70,000 from SGD $100,000, and spent SGD $15,000 on implementation, then the cost saving for this will be
SGD $100,000 – SGD $70,000 – SGD $15,000 = SGD $15,000
- For cost avoidance, the formula changes to
Cost avoidance = projected future costs - actual costs incurred.
When you decide to lock in a 5-year contract for raw material purchase at SGD $10,000/year, knowing a 2% year-on-year increase in the rates, you’re saving SGD $2040.40 with your cost avoidance efforts.
SGD $52,040.40 − SGD $50,000 = SGD $2,040.40
To document your efforts, keep proof of your projections and savings.
The runway equation for cost savings and cost avoidance
Your operational runway is directly proportional to cost optimization. If you have a reserve of SGD $1.8 million, and your monthly burn is around SGD $150,000, then you have approximately 12 months of runway. However, if you reduce your monthly burn to SGD $120,000 using cost containment techniques, that same reserve will give you 15 months of runway.
This is why cost savings and cost avoidance are equally important to a business. You’re future-proofing your business by making conscious decisions based on metrics such as inflation, insider information, stagnant investments, and resource optimization.
Ensuring quality while achieving cost savings
When you’re planning cost savings initiatives, you’ll come across spending that often seems unnecessary but has a big impact on the supply chain, production, or employee morale. Founders choose to strategically cut costs on things that do not affect the quality or the business operations.
While saving on expenses, these are some resources you can look for that ensure your product quality and team morale. This directly impacts your brand value in the market and team efficiency.
Types of cost saving initiatives
Founders around the world, including in Singapore, set cost savings benchmarks to meet their profit goals when revenue growth isn’t enough. These benchmarks lead them to implement different cost saving initiatives in the company, including:
1. Purchasing cost savings
These are procurement cost savings strategies you implement to optimise your sourcing spend. Employee and company purchases make up around 80% of the total expenditure in most industries from the APAC region. This means sourcing cost savings can lead to significant outcomes for your business.
Examples of procurement cost saving ideas:
- Consolidating purchases from a single vendor: When you purchase multiple items of inventory from a single vendor, it saves on shipping costs from different vendors, allows you to renegotiate pricing based on bulk purchases, and creates a stronger vendor relationship.
- Renegotiating contract terms: Revisiting vendor contracts, whether for reassessing the payment terms or negotiating the cost per unit, reduces your overall consignment cost. It also gives you a longer term so your company can hold a stronger liquidity position and avoid a payment crunch.
- Reducing off-paper purchases: Put a break on the surprise spending by making it visible. Once you start seeing the expenses, you can optimise them. Using a smart corporate card can offer you visibility on monthly purchases, expenditure, and spending patterns of every team member, allowing you to put a cap on it if necessary.
2. Utility cost savings
Electricity tariffs in Singapore have risen by 17.5%. With utility costs rising nationally, the need to cut costs where necessary also rises. However, electricity, HVAC, and internet are often some of the key utility services for any business. Cutting on these may impact production quality or increase operation time.
Many founders use the following utility and energy cost savings strategies to overcome the rising tariffs.
- Make use of government funds and grants: For companies based in Singapore, with over 30% local shareholding and an annual turnover of less than SGD $500 million, the Energy Efficiency Grant (EEG) offers up to 70% funding for SMEs and up to 30% funding for non-SMEs. The Energy Market Authority (EMA) offers financial benefits to founders who reduce electricity usage during peak hours.
- Choosing an energy provider from the Open Electricity Market: The Open Electricity Market (OEM) allows founders to compare and choose the most suitable energy provider for their business. Select the pricing plan that fits your operational cycle.
- Conducting a utility audit: An energy audit brings visibility to your utility usage, allowing you to find out areas where you can optimise energy consumption. This data lets you know whether you need to upgrade to energy-efficient equipment or optimise operating hours to achieve higher efficiency.
- Cloud cost savings: If you are using a cloud infrastructure platform like AWS with consistent usage, switching to a savings plan from an on-demand one can help in cloud cost savings of up to 72%.
3. Optimising store inventory
You can save costs by evaluating how long it takes for your inventory to sell out. Reducing stored inventory gives more liquidity, ensuring that your funds can be used for other key operations.
4. Opt for remote set-up
There are multiple reasons why you should consider a home-based business in Singapore, cost savings is one of them. Annually, Singapore founders spend on average SGD $26,520 in rent per person. So if you have a team of say 100 people, that’s around SGD $2,652,000 in rent that you can save on when you choose to go remote.
5. Labor and payroll cost savings
Manpower is one of the largest cost lines for most Singapore businesses, apart from rentals. EP minimum qualifying salaries now start at SGD $5,600 per month for general sectors, climbing to SGD $10,700 for professionals in their mid-40s. Add the SGD $650 monthly S Pass levy per holder, and a team of 10 S Pass holders alone costs you SGD $78,000 a year in levies before a single salary is paid. Hiring qualified locals and automating your back-office functions like invoice processing, payroll reconciliation, and expense management can help you reduce these costs.
6. Automate repetitive work
Most of your departments will have tasks that are repetitive yet important. Invest in an automating software to speed up the groundwork. For example, an expense management system with accounts payable can reduce the AP overhead by automating invoicing to speed up matching purchases to invoices, clearing them as your team submits them. For companies handling customer service, switching to AI bots can help in contact center cost savings, reducing the headcount while offering 24/7 assistance to your customers.
Types of cost avoidance strategies
When you’re cutting costs using cost saving techniques, it is worth exploring cost avoidance strategies as well to future-proof your savings. Most of these cost avoiding tactics are proactive steps in the right direction.
1. Locking in vendor prices
Inflation rates in Singapore are steady at 1.8% and are predicted to increase to 2.10% in July. With inflation comes a price rise of raw materials, office rent, outsourced services, subscriptions, and more. When you lock in the prices for the next few years, you are saving the extra cost that adds each year due to price increases.
2. Early payment for subscriptions
Many SaaS platforms offer early-payment or long-term payment discounts for founders who pay earlier than the due date or buy a bulk subscription, for example, a 1-year subscription instead of 3 months. With AP automation software, you can track these payments and create payment reminders to save on essential SaaS subscriptions.
3. Focusing on regular maintenance
Investing in regular maintenance of your machinery, devices, and tools ensures that they keep functioning well. This controlled spend helps you avoid surprise breakdowns and spontaneous repair costs.
4. Switching to a bid system for procurement
Instead of procuring raw materials from a single vendor, open a tender for suppliers offering the same supplies. Choose the one with the best price and quality to save on costs.
5. Invest in energy-efficient infrastructure
Installing appliances with higher energy ratings, good to excellent, in the company, incorporating renewable energy resources, e.g., solar panels, and operating heavy machinery during off-peak hours are some of the ways founders reduce their energy consumption without reducing their energy requirements.
45-day cost optimisation timeline
As a founder, lead your team to create a strategy cost saving timeline, normally a sequence of tasks handled over the span of six weeks.
Days 1 to 15 - Conduct an expense audit
Differentiate your fixed expenditure versus flexible expenses. Your fixed costs will include bills, leases, salaries, and such. While your flexible costs may vary according to the requirement.
- Cross-check your vendors and subscriptions with the state PSG-approved list of solutions.
- See if your software offers a discount tier in pricing if you’re paying for a longer term.
- Identify which contracts are renewing in the next year.
This creates the groundwork for your cost saving initiative.
Days 16 to 30 - Check what grants your business is qualified for
Enterprise Singapore offers a variety of grants and funds for businesses operating in the country. Explore the database to see which of your operations the government can co-fund.
- Enterprise Development Grant (EDG) offers up to 50% of the eligible costs for local founders.
- Productivity Solutions Grant (PSG) offers up to SGD $30,000 for automating your business operations with eligible solutions.
- Market Readiness Assistance (MRA) offers up to 70%, capped at SGD $100,000 for market set-up, overseas market promotions, and business development efforts.
Check the entire list of grants on the Enterprise Singapore website. Singapore offers great subsidies on different business operations, and founders like you must use them to your advantage.
Days 31 to 45 - Review your real estate and automations
Review your workspace utilisation. If you're occupying fixed commercial space that's underused more than 30% of the time, you have a direct line to savings. Flexible workspace solutions cost a fraction of traditional leases and eliminate the capital exposure of a multi-year commitment. The numbers founders are reporting, up to a 55% reduction in fixed real estate costs, aren't outliers.
Simultaneously, identify your highest-friction operational processes: invoice processing, expense reconciliation, contract management, payroll. These are the areas where AI-driven automation reduces processing costs, while directly countering the talent shortage pressures that Singapore's rising salary floors create. You build capacity without adding headcount.
End notes
Every dollar of operational friction you eliminate is a dollar you can redirect into growing your business presence in markets, retaining excellent talent, and developing your product. If you are a founder running a PSG-funded tech stack, an MRA-subsidised expansion into Vietnam, and a flexible real estate footprint, you’re already capable of making more aggressive business moves than your competitor who’s paying in full for everything.
When you build your business on cost efficiency with tasks like regular expense audits, lease negotiations, and automations,
- Your monthly burn drops
- Your runway extends
- You enter the next fundraising cycle with strength more than urgency.
The founders who build the most defensible businesses in Singapore over the next five years won't be the ones with the best ideas. They'll be the ones who figured out how to run lean, move fast, and reinvest with precision.
FAQs
What is the difference between cost avoidance and cost savings?
Cost saving is a reactive measure that reduces what you spend currently, whereas cost avoidance is a strategy you implement to avoid incurring future costs.
What are hard and soft savings?
Hard savings are directly visible savings in your P&L statements, but soft savings are expenses you avoid by intervening, for example, locking in a price with a contract to avoid cost increases.
What is the first step to cost savings?
An expense audit is the first step to cost savings. When you know where your money is going, you can optimise it to reduce spending.
How do I measure if the cost optimising initiatives are working?
Create and track KPIs such as operating costs, cost per transaction, productivity, and ROI against your baseline over time to measure the effectiveness of your cost optimising initiatives.
Can I save on costs without affecting my business?
Yes. Audit your expenses before cutting them to identify which of them are important and which can be reduced or removed without affecting team morale or production quality. Looping the key members of your team will also help ensure that your business runs smoothly while you save costs.
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