Building a company is one of the most rigorous and rewarding experiences that someone can take part in. Unfortunately, though, most businesses don’t last more than a handful of years, and part of this is due to poor financial management.
One of the best ways to properly manage your company’s finances is to incorporate a solid cost control model. But, not everyone knows how to go about it (or what it involves).
What is cost control?
Cost Control is concerned with measuring variances from the cost baseline and taking effective corrective action to achieve minimum cost overruns. Implementing this level of control can have a profoundly positive effect on profits in the long run. Cost control involves the following four steps:
- Establishing a baseline: By establishing a standard or baseline costs you can compare actual costs and see differences . These standards can be based on historical results, a reasonable improvement in historical results, or a theoretically best achievable cost level. The average alternative is generally considered to give the best results because it sets an achievable standard.
- Variance Calculation: The variance calculation between actual results and the standard or baseline can be noted in the first step. Particular emphasis is placed on the detection of unfavorable variances, which are those actual costs that are higher than expected.
- Variances Investigation: a conducted and detailed drill-down into the actual cost information can let you ascertain the reason for an unfavorable variance.
- Taking action: based on the information found in the preceding step, you can take needed corrective actions to reduce the risk of continued unfavorable cost variances
Cost management vs. cost control: What's the difference?
If we talk about cost management, you can probably be confused, because cost management and cost control are two terms that often get mixed up.
Cost management deals with planning and budgeting, while cost control deals with actual costs and the actions taken as a result of those costs. For example, when creating a budget for the following year, a company uses cost management to prepare it. At first the company starts a planning process, which includes products or services they want to offer and how you will be delivering them to their customers. The planning stage should also include initial financial projections, which will later be used in their budget. As a next step, organizations will need to estimate the related costs of those processes and use those numbers to create a budget, or a baseline to measure against.
That’s where cost control comes in. Thus, while cost management covers the full life cycle of a project , cost control is seen as a separate action of this cycle.
Ways to effectively control costs in your small business
To have an effective cost control system, you should pay attention to accurate budgeting, including a way to measure budget variances in real time. For example, if you are managing a project, you want to proactively measure variances in the budget and quickly respond to variances such as cost overruns to ensure the project runs smoothly. Or if on the other hand your production and output costs have increased significantly, you shouldn't wait until the end of the year to fix the issues that caused the increase in production costs. So, how can you optimize cost control in your business?
Work on a proper budget preparation
The best way to implement cost management and control procedures is to develop a budget. Take the time to create a budget that is not just a rough estimate, but uses historical data as a basis. If this process doesn't work for you, consider using a zero-based budget, which allows you to start from scratch by justifying each operating expense before including it in your budget.
Keep track of the inventory
Inventory levels can play a big role in whether profits rise, fall or stay the same. If you sell merchandise, you need to learn to walk a fine line between having enough inventory in stock to fill orders on time and overstocking, which increases costs and can end up in waste.
This is especially important if your inventory has an expiration date. Manage your inventory properly, and your costs are likely to go down as well.
Drill down behind the numbers
When you look at your financial statements at the end of the month, you notice that your net income is much lower than expected. But to get to the bottom of the unexpected drop in profits, you need to know why they're down. Are your fixed costs higher than your original financial projection? Did your supplier raise prices? All of these things can affect your bottom line, but you can't fix the problem if you don't know what caused it. For example, if your costs have increased because of supplier price changes, you need to address the problem with corrective measures, which may include negotiating a price reduction or even changing suppliers. By accurately identifying the problem, you will regain control of your costs and be able to start working toward your goal of increasing profits.
How the expense management solution can help you
To simplify cost control operations, increase productivity and boost the bottom line by improving the process, companies are using the automated expense reporting software. The Jenji expense management software includes a dashboard that compiles employee expense data and presents it in an easy-to-understand visual format using charts and other graphics. Managers can view metrics, like how much a company spends per employee or per category or the average time it takes to approve expense reports. Enhanced reporting helps with financial planning and analysis as companies assess current spending and find ways to increase efficiency and trim costs.
If you want to know more about our expense management solution, we would be glad to assist you! Do not hesitate to contact our team at email@example.com