During the 1990’s cost control initiatives received paramount attention from corporate America. Often taking the form of corporate restructuring, divestment of peripheral activities, mass layoffs, or outsourcing, cost control techniques were seen as necessary to preserve – or boost – corporate profits and to maintain – or gain – a competitive advantage. The objective was often to be the low-cost producer in a given industry, which would typically allow the company to take a greater profit per unit of sales than its competitors at a given price level.
Cost control and reduction refers to the efforts business managers make to monitor, evaluate, and trim expenditures. These efforts might be part of a formal, company-wide program or might be informal in nature and limited to a single individual or department. In either case, however, cost control is a particularly important area of focus for small businesses, which often have limited amounts of time and money. In a small business the focus is often on selling and servicing the customer. This leaves the task of purchasing slightly sidetracked. Even seemingly insignificant expenditures – for items like office supplies, telephone bills, or overnight delivery services – can add up for small businesses. On the plus side, these minor expenditures can often provide sources of cost savings.
Cost control refers to management’s effort to influence the actions of individuals who are responsible for performing tasks, incurring costs, and generating revenues. First managers plan the way they want people to perform, then they implement procedures to determine whether actual performance complies with these plans. Cost control is a continuous process that begins with the annual budget. As the fiscal year progresses, management compares actual results to those projected in the budget and incorporates into the new plan the lessons learned from its evaluation of current operations.
One trend in cost control has been toward narrowing the focus of corporate responsibility centers, and thereby shifting some of the cost control function to day-to-day managers who have the most knowledge of and influence over how their areas spend money. This practice is intended to promote bottom-up cost control techniques and encourage a widespread consensus over cost management strategies. Through the budget process and accounting controls, management establishes overall company objectives, defines the centers of responsibility, and determines specific objectives for each responsibility center, and designs procedures and standards for reporting and evaluation.
Cost control is the practice of managing and/or reducing business expenses. Cost controls starts by the businesses identifying what their costs are and evaluate whether those costs are reasonable and affordable. Then, if necessary, they can look for ways to cut costs through methods such as cutting back, moving to a less expensive plan or changing service providers. The cost control process seeks to manage expenses ranging from phone, internet and utility bills to employee payroll and outside professional services. To be profitable, companies must not only earn revenues, but also control costs. If costs are too high, profit margins will be too low, making it difficult for a company to succeed against its competitors. In the case of a public company, if costs are too high, the company’s may find that its share price is depressed and that it is difficult to attract investors.
The following are some simple successful cost control techniques that can be used in any sort of business:
- Review and Modify Business Model: There is a great, economically and commercially successful business model, that is used to lay down the foundations of any company. The business model must be however subject to small and big changes. It means as a manager, you should subject the business model to changes according to your competitors actions and markets status.
- Daily Updates: One of the best ways to start controlling costs it to have daily updates of production, all possible long and short term expenditures. Divide all these expenditures, even the ones such cost of machinery or insurance, and sales, by the number of working days. This will give you a concrete figure of the total amount that has been spent. Similarly after sales of your goods or services, you may also divide the total amount of sales by the number of working days. This will give you a micro figure about the daily expenditure and sales. It will definitely help you to zero down on all possible cost problems that you incur.
- Uniformity: Cost control management is all about deriving the best outputs in a least cost. Hence, set up a highly efficient and specialized stores department which will oversee all purchases. You may also take a risk and make long term agreements regarding the quality and quantity of materials that are being supplied to your manufacturing process. This uniformity will ensure a timely, cheap and assured supply of raw materials.
- Time Planning: Time is money! Well divide the amount of wages that you give out with the number of work hours per month. Explain to the employees per hour expenditures that you incur, and hence the necessity for time management. You may also install good cost control systems, in order to help your employees to manage their work hours well. A cost control software will also work wonders in the finance and accounting department.
- Renegotiate all Contracts Annually: For whatever reason, businesses presume that multiple year contracts will result in lower costs. Maybe sometimes, but not always. A smart company policy is not to have the life of a contract exceed one year. This forces annual bidding or at least renewal discussions with the current suppliers. Almost always these discussions will result in lower cost of goods. A multi-year contract will usually favor the vendor. Of course this is a lot of work, but it sure pays out.
- Ask your Customers: Annual planning sessions with customers have many benefits. Naturally these discussions primarily should focus on ways to grow the business. But too often these discussions fail to address costs. By discussing costs holistically up and down the combined supply chains, customers often can recommend ways to reduce costs. For example, how to take wasted steps out of the process, or how to plan jointly to smooth production, or maybe even how to change the product mix to get rid of costly items and replace them with some that are more profitable. Talking to the customer is never a bad thing. But talking about how to jointly improve business deepens the relationship, shows them you care, and helps reduce costs for both parties.
- Match Terms with Turns: Each item in your inventory moves at a different rate, and yet suppliers normally apply a one size fits all approach to payment terms. You can reduce your working capital to zero if payment terms were matched with the inventory turns of each item. By negotiating this into your contracts it incents the suppliers only to sell the best moving items and to work with you to improve inventory productivity. The results will free up cash that can be deployed elsewhere in the business and improve profits.
- Ask Vendors to own their Inventory: Better even than matching terms with turns is to have the vendors keep title to their inventory until sold. Normally inventory acquired from a vendor is held in your warehouse for use in manufacturing conversion or resale to your customers. But why think of it as your inventory, it hasn’t been used yet so why isn’t it their inventory. Best planning results in “just-in-time” delivery so there is no inventory. But this isn’t always possible, for instance, in industries like retail where that inventory is necessary for your own customers. But again, why are you paying them and then sitting on their inventory. They need to own the inventory until time of sale. This is commonly referred to as “scan based trading” or “just-in-time trading.”
Some cost control proponents believe that cost control must be planned carefully, as not all cost reduction techniques yield the same benefits. To determine the strategic impact of cost control techniques, management has to weigh the net effects of the proposed change on all areas of the business. Management must also consider whether saving money on production is jeopardizing other strategic interests like quality or time to market. If a cheaper material or transportation system negatively impacts other strategic variables, the nominal cost savings may not benefit the company in the bigger picture, e.g., it may lose sales. In a notable late 1990’s example, chief executive Albert J. Dunlap, nicknamed “Chainsaw Al” because of his penchant for deep cost cutting at the companies he headed, failed to restore the ailing small appliance maker Sunbeam Corporation to profitability despite his drastic cost reduction tactics. Dunlap laid off thousands of workers and sold off business units, but made little contribution to Sunbeam’s competitive position or share price in his two years as CEO. Consequently, in 1998 Sunbeam’s board fired Dunlap, having lost confidence in his “one-trick” approach to management.
Read More: Al Dunlap at Sunbeam