Improve cost control with 7 simple steps

In this article we will look at some simple steps to how you can improve cost control in your business.

Solid cost control mechanisms will most likely  reduce your business’ expenditures. If done correctly, these cost reductions can directly impact your business profitability in a positive way.

1. Set up a solid budget

A budget is your estimated income and expenses for a certain period of time. This might seem needless to say. However, according to a study by Clutch, only 54% of small businesses operate with an official budget. Therefore, it is worth highlighting the importance of solid budgeting here as well.

Some main types of  budgets you should be familiar with are:

• Master budget – This will be your overall budget. Typically the master budget is a consolidation of several lower-level budgets in your business.
• Operational budget – The budget that includes your revenue and expenditures. Your profil and loss statement will often be compared to this budget.
• Operating project budget – A part of the operational budget. If you are working project-based, you should be budgeting the projects indivually.
• Cash budget – A budget showing you how much money you have now, and in the future.

2. A plan that aligns with your budget is a great foundation to improve cost control!

Sounds logical, but many companies actually fail here. Many businesses base their budgets on last years activities. At the same time, they might have new strategic initiatives. Are they covered in the budget?

When planning and aligning your budget and activities, you should consider the following factors:

• Activity plan – You have set a target. Ensure that you plan the activities in order to be able to reach that goal. And make sure you have budget for these activities
• Ensure stakeholder commitment – The main stakeholders and contributors should commit to the plan, and the budget.
• Be open for tweaking the plan – Very relevant if chasing new strategic initiatives. Unexpected challenges will occur, and you might need to revise the budget.
• Always be realistic in planning – Ambitious planning is great. Unrealistic planning can be a motivation killer. Make sure you keep it realistic.

Establish this, and you have a great foundation to improve cost control.

3. Track actuals vs budget, act upon deviations

Tracking actuals against budget is key for controlling. Doing this manually can be a time-consuming process. Only looking at invoices processed in your accounting system gives you the truth. However, when you get this data new commitments have been made.

A proven way of managing this is to use a procurement software that also offers a budget module. By doing so, you get real-time information so you can easily track the budget performance.

Furthermore, you need to act upon deviations. Is there room for changing the plan? Can you reduce cost? Should some of the extra costs be reimbursed? Actions can be many. The earlier you spot deviations, the easier it is to act upon it.

4. Negotiate terms with your suppliers

Supplier terms and prices are often subject for negotiations. Knowing how and what you can negotiate on is a good starting point. Some main areas you should cover are:

• Set a goal for the negotiation – Know what you want to achieve when triggering a negotiation.
• Be prepared – If you want to negotiate prices, you should prepare accordingly. How much are you bying from this supplier? Increasing or decreasing volume and prices?
• Negotiate not only on price – Most likely there are other things to negotiate on than just prices. Examples can be quality, delivery terms, payment terms or quantities. All important for your business.
• Ask for quotation on extraordinary purchases – You might have a price on certain articles. However, if you are buying large you can most likely get even better terms.

Supplier negotiations can be short-term or long-term. Depending on your business, you should also consider setting aside a dedicated period for doing these negotiations. At least for your key suppliers.

5. Establish a solid invoice matching routine

A solid 3 way matching ensures that you pay the correct amount. Easily explained, you match the invoice value against the original purchase order and your goods receipt.

By doing so, you ensure that the payments are correct. An additional value, you have a good process to avoid fraudulent invoices.

6. Use efficient tools and systems

In today’s digitized world, there is a wide range of systems available for you. Most companies operate on an accounting system. This can be large-scale ERP systems or simple and efficient cloud-based systems. Also, many companies have a wide use of spreadsheets. This allows for more detailed information. If you have the right person in your team, it can also be tailored to your specific requirements. However, as you grow your business you will need more powerful and dedicated tools to efficiently control cost.

A powerful tool to improve cost control is a purchase order system. The benefit of a purchase order system is that you will get an overview of your commitments early, and you can take corrective actions if necessary. Some purchase order systems also come with a budgeting module.

The great thing today is that technology and tools are easily accessible. A lot of systems also offer a free trials, so you can ensure that it is the correct fit for you.

7. Evaluate and take learning points into new budgets

Finally, learn from your experiences. Too often, projects are finalized and new projects are set up the same way as always. By doing this, you are likely to repeat the mistakes done previously, and you will also experience the same type of cost overruns. Set aside time for evaluation. Take notes of what was successful and what can be improved.

Continous improvement will elevate your budgeting and planning to a new level.

See also:

8 great benefits of using a purchase order system

CostTracker is an easy-to-use purchase order (PO) system helping small businesses with purchasing and cost control. It offers several unique features designed for project-based companies.

CostTracker helps hundreds of companies in more than 35 countries worldwide.