Cost Management And Business Profitability
The term Cost Management includes both cost control and cost reduction investment decisions. It recognises that the objective should be a better business, not just a cheaper one.
For a business to be successful and stay that way requires some knowledge of business cost controls.
Cost management is simply the preparing and calculating of your business finances so that you can determine ahead of time when expenditures will fall due so that you can alter or regulate cash flow.
Through cash flow mastery and managing costs, businesses can regulate their cash accounts, increase productivity and stay on top of risks to profitability.
Four cost management tips for business
1. Develop a corporate culture of effective cost management
If leadership is complacent about financial performance and cost control, there is little chance that a cost-saving project will succeed. Executives must take an interest in reviewing expenses and reducing costs – often staff will mould their behaviour to match that of management.
2. Understand where you spend your money
Determine what goods you need and services you require. There is no need for gold – plated service if standard services are adequate. Buying unnecessary extras or add-on services such as maintenance agreements will prevent you getting value for money. Also, avoid loyalty programs that offer freebies such as bottles of wine or tickets to sporting events to lure you away from more competitive offerings?
3. Consolidate your purchasing
Quite often, we see different divisions or departments within the one company buying from a variety of suppliers, losing any opportunity to consolidate purchasing and negotiate better pricing.
4. Be consistent
Create a culture of ongoing cost management, not just a “flavour of the month” approach. Establish benchmarks that allow for ongoing comparison, to ensure you are always on top of costs. Measure them as a percentage of sales, thereby ensuring that if sales drop, you can see costs drop accordingly.
Business cost management is conceptually easy but doing it properly isn’t. If you find this all a bit overwhelming you could consider managing man-hours instead. Logically, if a high labour project is managed well from a man-hour perspective, then the costs should follow.