Cost Control Should Be A Process, Not A One-Time Event
by: Kevin A. Simpson, CPA
Even during good economic times business are constantly striving to improve profitability. The basic goal can be achieved by either increasing sales or reducing costs or a combination of the two. The importance of cost control programs cannot be overstated.
Knowing how to implement effective cost control programs can be the determining factor in the survival of a business. A good cost plan is the one that focuses on lowering costs in every business activity possible.
Typical areas that are likely candidates for cost control programs are:
Communications (long distance, cell phones, PDA’s and beepers
Maintenance (janitorial, repairs, lease hold improvements)
Inventory
Utilities (electrical and gas)
Cost control vs. cost cutting
Cost control is different from cost cutting. The word control indicates an exercise in restraint. When expenses are controlled, they are restrained from growing larger than they should grow. The process of cost cutting, on the other hand, concerns reducing expenses that are too high. Controlling is a very different concept than cutting.
In terms of business practices, cost control is usually a better action plan. It indicates that expenses have not been allowed to grow past a reasonable level than what the expenses are intended to accomplish.
There could be debate over which is easier; controlling or reducing expenses, but controlling costs is the best way to maintain or increase cash flow.
Cost control requires strategic management - cost cutting is a reaction to a problem. It is always better to be proactive rather than reactive. To control costs means managers are on top of their operations and attempting to maximize profitability. When managers are forced to implement cost cutting programs they are attempting to solve problems that could have been avoided.
Cost control affects every expense category in accompany. But cost control is a lot more than just saying “no” to incurring expenses. It is a management technique that requires all business activities to be evaluated on several levels.
Questions that managers should be asking as they review their operations include:
Is the activity designed to operate as efficiently as possible?
Are the necessary materials being purchased at the lowest price maintaining our quality standards?
Can a processed be mechanized or computerized to minimize labor costs
Cost controls a systematic review of the resources a company uses to achieve its mission. Cost control is cost management. Reviewing expenses to find areas that can be cut is not nearly as effective as upfront cost management. To determine if costs are remaining within reason, it is desirable to compare expenses against industry benchmarks. Expense benchmarks are indicators of competitive standing.
One of the major benefits of cost control is the ability of a company to keep cash flow at necessary levels for operations. This prevents excess amounts of cash from being tied up in too much inventory or overstaffed departments. This keeps cash available for expansion, equipment upgrades and other acquisitions.
Hard work required
The main problem with cost reduction programs is that require a lot of hard work. Achieving lasting and positive cost reduction requires creativity and imagination. It’s one of thin to declare that “we must reduce shipping costs by 10%” but actually making it happen is often a difficult task.
Most cost reductions plans are really cost cutting initiatives used to make budget or shore up a bad quarter. They are abandoned as soon as things turn around. This short-term focus can be destructive in the long term. Managing costs should be a strategic decision.
Many companies use outside assessments to analyze company efficiency, including the results of control efforts. This not only brings new viewpoints to the process, but it also provides important internal review. Sometimes it is difficult to be objective when you deal with the management of a business on a day-to-day basis. Professional analysts can bring a broader scope to operations resulting in improved cost control strategies.
A customized assessment of company operations can improve cost control measures already taken in a company. Businesses that understand the difference between the concepts of constraining and cutting will most likely appreciate the value of expert advice.
Companies that understand the importance of cost control as a tool to increase profitability have a much better chance of remaining profitable and surviving the current economic downturn. These companies understand that managing expenses is every bit as important as managing revenues. A regular view of all costs can prevent a company from wasting money. This is just as important in good times as in bad.
The key is to make cost controls an integral part of the company culture. Business success is about teamwork and it takes teamwork to control costs. A core concept of the Wireless MBA addresses cost control in the retail environment. For more information on the Wireless MBA, email Meg Nigro at or call 630-778-9914.
Kevin A. Simpson, CPA is a principal with Focus Capital Advisors Inc. Certified in mergers and acquisitions, he has completed a number of transactions in a variety of industries. He can be reached at .
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