A structured approach to cost control is essential in any well-managed business and can have an immediate and sustainable impact on its profitability.
This article explains how to identify and monitor business costs and how to carry out cost-benefit analysis to assess which costs are justified by the benefits they bring to the business.
The factsheet also outlines good purchasing practice and includes a checklist that highlights a number of areas where business costs can be reduced.
In order to control costs, the first step is to identify them clearly. Whether a start-up or an established business, it is important to prepare an annual budget showing expected expenditure in three main categories:
- Variable costs (ie, costs that will vary in relation to sales), such as the wholesale cost of goods bought for re-sale, components that go into products the business manufactures, or commission paid to sales staff.
- Fixed costs (often referred to as 'overhead' costs), which stay more or less constant, irrespective of changes in sales, such as:
- Staff salaries.
- Rent and business rates.
- Telephone, internet and utilities charges.
- Business insurance.
- Finance costs, such as bank charges, loan interest and depreciation on equipment.
- Capital costs, for example the purchase of new machinery or an IT system.
- Can it be produced or supplied with cheaper materials or resources?
- Can it be produced or supplied more cheaply if some processes are outsourced?
- Can it be produced more quickly than at present?
- Can less material or fewer resources be used?
- Can wastage be reduced?
- Review the cost of stock regularly by comparing the prices of current suppliers with others in the market.
- Negotiate with or change suppliers in order to achieve a better deal.
- Agree prices in writing in advance of placing an order.
- Control stock levels accurately, in order to be able to meet customer demand without incurring unnecessary storage costs or tying too much money up in stock.
- Set up a system to ensure that purchases are authorised before being made, and that no unnecessary goods or services are ordered.
- Allocate a reference number to every purchase order, to make it easier to track invoices and monitor spending.
- Staff costs
- Keep staff numbers under review: Can fewer people be employed to carry out the same task?
- Consider employing fewer full-time staff and using freelance or temporary workers during busy times.
- Ensure that staff are motivated and supervised appropriately so that they work as efficiently and effectively as possible.
- Travel costs
- Make arrangements for travel and accommodation well in advance, where possible, to benefit from early booking discounts.
- Consider using a specialist business travel booking website. These provide business accounts that enable a business to set customised travel budgets for staff and keep track of total spending. For an example, go to https://business.booking.com.
- Set maximum allowable expenses claims for meals, etc.
- Remove the need for travel where possible by using videoconferencing for meetings.
- Energy costs
- Carry out an energy audit to determine what changes can be made to become more energy efficient, for example replacing outdated machinery, switching off unnecessary lights, computers, etc, and ensuring that premises are adequately insulated.
Many energy suppliers provide guidance to businesses about how to carry out an energy audit. For an example, go to www.gazprom-energy.co.uk/energy-guides/how-to-conduct-an-energy-audit-of-your-business.
- Regularly review alternative energy tariffs by using online comparison sites such as www.utilitywise.com and www.makeitcheaper.com.
- Internet and telephone charges
- Shop around for the best broadband and telephone deals, using online comparison sites such as www.broadbandchoices.co.uk/business and www.broadbandgenie.co.uk/broadband/business-broadband.
- If staff in the business make a lot of international calls, consider using voice over internet protocol (VoIP) telephony services such as Skype to save on international call charges.
- Paper and printing waste
- Encourage staff to print items only when really necessary.
- Set printers and photocopiers to default to duplex (double-sided) printing where possible.
- Ensure that waste is examined for potential recycling or resale to recycling services.
- Send used laser printer cartridges to be refilled and buy them back at a lower price.
Make It Cheaper is a website that helps small business owners search for the best deals for gas, water, mobiles, landlines, broadband and insurance.
Moneyfacts offers a business banking and utilities tool that helps businesses compare bank accounts, energy suppliers and phone services to find the best deals.
The Carbon Trust has useful information on reducing energy usage and saving money for businesses, including sector-specific guides.
In addition to identifying expected costs in a budget, it is important to record actual expenditure and review it regularly to assess how the actual costs the business is incurring day to day compare with the budgeted costs. Any variations or excessive spending can then be spotted and addressed at the earliest possible stage.
To make it easier to see where money is being spent in the business, all costs should be assigned to 'cost centres'. These are segments of the business where similar costs are grouped together. Typical cost centres are human resources, stock, overheads and finance.
It may also be worthwhile to record each cost as a percentage, either of total cost or of income. This will not only highlight the critical costs and help compare them with others, but should also indicate when expenditure on specific items is rising, giving an early warning that there might be a problem.
Cost-benefit analysis should be an integral part of every business planning process. This is the process of comparing the cost of a project against the benefits it will bring to the business. It is important to determine whether the benefits outweigh the costs, making the project worthwhile. In meetings and planning sessions, the overall impact of any decision should be understood in terms of its cost, its benefits to the business and its impact on profitability.
For each product or service that the business supplies, it is important to determine whether there is any way to reduce its costs without affecting its quality, by asking questions such as:
Purchasing and stock control
Costs can also be controlled by adopting good purchasing practice. When ordering stock, it is advisable to:
Checklist for reducing costs
The following checklist highlights some ways to reduce costs across a business.