Techniques of Cost Control

Controlling costs is one of the primary duties of any business manager. It is not uncommon for effective cost control to dramatically increase profit margins and offer the dual benefit of freeing up company resources, enabling the company to focus on building growth rather than just getting by. Understanding how costs are controlled is a skill that every business manager must have to be successful.

Controlling Costs

The positive effects of a cost control plan can be seen almost immediately. To develop a plan, first begin by identifying the real costs shouldered by the company, everything from overhead to the cost of inventory. Then, separate these costs into categories (i.e. staffing, accounting, raw materials, utilities, corporate perks, etc.). Some of these will be indispensible (think research or marketing); others can use some paring (think corporate perks). Next, identify which costs can be mitigated (1) with the least cost and (2) with the least time. Also, take some time to outline future cost cuts, so that a plan of action can be developed.

So, at this point, it becomes necessary to think about these potential cost savings in terms of the objectives of the business, particularly regarding production standards (for example, target production of 1,000 units per month). Evaluating performance as it relates to those standards is self-explanatory; simply compare the actual to the estimate production. If the two are disparate, develop a plan of action to mitigate the gap between the actual and the estimated.

It is also important to evaluate cost cuts as they may affect long-term goals. For example, if the business manager of a small software and consulting company sees that a high cost is attributable to consultant expense accounts, he may blindly advise that the spending be cut. However, further review into the expense accounts shows that the consultants are working on a vendor contract that would be worth $3 million per annum.

Some Advice

Basically, do the research and tread lightly. Cost saving should be constructive, not revolutionary. The best changes are small ones, involving better -- more efficient -- ways of doing things. Common cost savings can be found in accounts payable, purchasing, cutting down on excess, eliminating unnecessary processes, etc.

It is also important to name specific people responsible for overseeing cost cuts and to follow up on their effectiveness regularly. Efforts to cut costs are most effective when everyone is involved, so be inclusive. Responsibility and involvement are key to successful cost-saving initiatives.