Cost Control

Cost control is a series of policies and procedures that detect, diagnose, and correct differences between actual and budgeted costs in your business. It is a routine, continuous set of activities that starts at the top and is contributed to by everyone in an organization. Cost reduction is done periodically and can have dramatic effects on your bottom line, but without a sound, on going cost control program, the effects may be short-lived. In today’s increasingly competitive business environment, getting the most from existing resources while ensuring that costs don’t escalate is one of the keys to business success.

Cost control can be broken down into many parts and the larger and more complex your organization is, the more detail may be necessary, but there are four main elements to a well planned cost control program.

*Budgets and Financial Reporting
*Purchasing
*Costing
*Analysis and Review

Every company large or small should have budgets and review them against actual costs on a regular basis. For budgets to be useful they must be as accurate as possible and should be based on your actual experience. Accurate financial reporting is essential to produce budgets and to compare your company’s performance against. The better your reported history the better you can budget. If you do a comprehensive budget for your overall business at least once a year, you will have the opportunity to evaluate costs and make decisions that will increase profits. A well thought out financial reporting system will make analyzing business costs and company performance very easy and should be tailored to match the type of business that you have.

Purchasing should have very definite controls in place and has the potential to save or cost your company lots of money. Requisitions, bid requirements, approval and monitoring policies are very simple to implement and maintain and have long term positive effects. Coupled with budgets, these policies and procedures become the norm and will help maximize profits.

Costing is the process of keeping track of what is actually spent to sell a product or service. Depending on what business you are in there are different methods and complexities for costing. I have been telling people for many, many years that if you don’t know how much it costs to produce something, you can’t know how much to sell it for. There are several components to good costing. Standard costs, budgeted costs, and actual costs are all important to document. Standard costs are the costs that you would have in an ideal world and are the benchmarks that are used for analyzing your performance. Using external (industry averages or other similar organizations) benchmarks may show that your performance is above or below average and give you good guidelines for improvement. Standard costs assume optimum performance and use of resources. Budgeted costs may be higher than standard costs, as you might take into consideration waste, shrinkage, or other real world factors. Comparing actual costs against standard and budgeted costs helps you focus in on areas that can be improved.

All of these components have benefit, but without regular analysis and review many opportunities for improvement will be missed. A set of well thought out procedures, policies, and reports will tie together all of the information that owners/managers need to make sound decisions that increase profits and keep you competitive. The very definition of cost management means not creating tedious, time consuming tasks, but rather concise, relevant, snapshot reports that allow decision makers to quickly measure how the operation is doing at any given moment.

Business success is about teamwork and it takes teamwork to control costs. Having all the pieces in place and with the support of top management, cost control becomes less about constraint and more about evaluation and improvement that can be appreciated and contributed to by everyone in the organization.