The key to the success of your business is that your income should exceed your expenses. Your profitability can be improved by increasing sales, but it can also be enhanced through the reduction of costs.
A business which keeps its costs under control will be able to release more resources for growth in the good times and will be in a better position to survive in recession.
Cost control is only possible in a well organised, well managed business.
(i) To control costs, you first need to know about them. Every cost should be identified clearly and records of bills, etc should be kept.
(ii) Costs need to be reviewed on a regular basis. It is not enough to calculate whether your business is in profit or loss, you also need to be aware of what normal costs are, so that anomalies can be spotted and corrective action taken.
(iii) Some costs will be more important to control than others. It is important to know what your critical costs are and to concentrate on reducing them.
(iv) Cost control is the responsibility of everyone working in the business.
All staff have many opportunities to affect costs and if kept motivated and they feel part of the business, they will work economically without supervision. It is also a good idea to involve employees in coming up with ideas to reduce costs.
(v) Many staff can assume that any savings they might make are insignificant, however informing them about the impact of costs on profitability can help change their attitudes.
Direct Cost Control Measures
(i) Cost Benefit Analysis
Cost awareness should be a key part of your planning process.
The overall impact of any decision should be understood in terms of business profitability, ie the benefits of a particular course of action should be set against the cost.
(ii) Value Analysis
Value Analysis (VA) takes each part of a product, service or system and subjects it to detailed examination to determine if there is any way in which its costs could be reduced without affecting quality.
VA is usually done in a group and is a good way to involve employees and increase general awareness of cost control.
Each aspect of the product is challenged with questions such as: is it necessary, can it be made with cheaper materials, can it be bought cheaper than it costs to make etc.
(iii) Purchasing Methods
Significant savings may be derived from good purchasing practice as no bill or invoice your business receives should be taken for granted. Generally speaking, it is advisable to:
* Look for discounts for buying in bulk.
* Be prepared to haggle.
* Review the cost of supplies and suppliers on a regular basis.
(iv) Stock Control
Accurate control will reduce storage and working capital costs and effective security should reduce the cost of stock lost through theft. …