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Cost Control: Increasing Small Business Profits

Cost control techniques can help you rein in undisciplined spending habits and get your business saving the money it needs for survival, expansion or investment. Find out more about how to use cost control and why it should be part of your arsenal.

Cost control can be a great solution if your business is dealing with spiralling costs, cash flow problems and poor financial performance. It’s a process which can increase profits and improve efficiency by letting you drill down into your business expenses and find ways to save money.

If things go well, your business will have enough money to pay off loans, fund expansion or start paying into a business savings account

What is cost control?

Cost control is an essential part of healthy budgeting in a business environment. Every business should have a budget, but you might find that your business’s costs can exceed the levels you had anticipated. This is where cost control can come in handy.

Simply put, cost control is the act of monitoring and managing the costs your business faces to reduce or contain expenditures.  

Some businesses will even hire a cost controller to work full time at identifying and eliminating needless expenditures, though this is not normally an option for smaller businesses. That’s not a problem though, because cost control is something that business owners can do themselves if they have the right know-how. 

Cost control in steps

To get started, here are some simple things you can do: 

  • Build a budget: Every business, big or small, should have a budget. This should include predicted expenses, income and profits. If you’re unfamiliar with the budgeting process, it’s time to make one with our comprehensive guide.
  • Check your budget: Having a budget is one thing, but checking it is another. Regularly totting up your business’s financial performance against your budget will allow you to easily identify areas where your costs are exceeding expectations.
  • Take action: Once you have identified a problematic area of your business finances, you can start working to combat the issue.

Organise your costs

A cost is any type of expenditure faced by your business. Separating these into different types of costs can make your next steps in tackling costs much clearer. For example, when looking at regular costs you might choose to make a distinction between fixed costs and variable costs.

Fixed costs stay the same each month, and may include:

  • loan repayments
  • rent
  • salaries
  • insurance

Meanwhile, variable costs are more changeable. Some examples of variable costs might be:

  • raw materials or ingredients
  • utilities
  • hourly wages

Understand that reducing fixed costs can be a difficult task, with cutting variable costs often a much better bet if you are on the hunt for some quick wins. 

There are other ways in which you can organise your costs too. For example, you might split costs into online and in-store costs, or dine-in vs takeaway, to find out if one aspect of your business is costing too much. 

Splitting your costs into different categories like this can help you to identify areas where cost control techniques can make the biggest difference, without harming your business.

Cost control: Practical examples

Here are some cost control strategies to help you to reduce your business’s costs.

  • Renegotiate contracts: If you think you are overpaying a provider, such as your business energy provider, try going to them for a deal that better suits your needs. In addition, some contracts, such as phone and broadband, may auto-renew when they come to the end of their term. Re-negotiation is not always possible and should not be attempted too often, but it can be an effective way to save money.
  • Find cheaper providers: If you cannot get a cheaper deal with your current suppliers and providers, it might be time to shop around for a better deal.
  • Unnecessary expenses: You might find that your business is paying for a product or service that you simply never use. If so, cancelling subscriptions can be a good idea.
  • Reduce waste: If you’re spending too much money on things like raw materials, energy and water, consider how much is going to waste. Are you binning leftover resources, leaving machinery running overnight or failing to repair leaky pipes? Using the resources you pay for effectively can significantly reduce costs by cutting bills, reducing order sizes or eliminating waste collection costs.
  • Improve efficiency: Use technology or improved processes to free up time and give your company or employees the kind of increased efficiency that can really make a difference. This might mean automating processes where possible with things like accounting software or hiring freelancers to complete onerous tasks that are bogging you and other employees down.

There are many other ways to control costs too, but make sure any changes you make don’t have a negative impact on your customers’ experiences. In addition, you should be careful about changes affecting your employees and yourself. 

Cost control advantages and disadvantages

Pros:

  • cost savings can mean more money for profit, expansion or savings
  • improved flexibility, allowing you to tackle unexpected financial challenges or embrace unforeseen opportunities
  • can create a culture of efficiency and common sense within your business 

Cons:

  • customer or employee experience can be damaged by excessive cost-cutting
  • can be a time-consuming process 
  • reducing the wrong costs could impact the functionality of your business

The importance of cost control

Smart implementation of cost control strategies can result in the kind of cost savings that have a real material impact on your business’s success. It could free up the costs to keep you afloat, hire a new employee or simply improve your return on investment (ROI).

In addition, strong and successful cost control can impress investors or lenders, leading to improved opportunities for your business.

Finally, it can also improve your business acumen and decision-making skills. In the future, you will be better equipped to use logic and research-driven techniques to guide major business decisions you make in the future, such as a cost-benefit analysis.

Image source: Getty Images

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