Cost Control as a tool for innovation and growth

Cost Control Strategies, Cost Control Challenges

The modern business landscape has historically been more concerned with innovation and disruption than with cost control solutions. But the fact remains that to run an efficient business and to increase profits, optimize budgets, and ensure long-term financial sustainability, cost control solutions are key.

A common mistake management teams make is lumping cost controls in with machete-wielding cost-cutting initiatives. Cost-cutting initiatives and cost-control solutions are not one and the same. Effective cost control solutions are proactive and support innovation by recognizing inefficiencies and finding solutions before they drain resources. Cost-cutting initiatives are often reactive and look to remove programs, departments, or other costs because of an urgent need to reduce spending.

Cost control is, in fact, an integral part of managing any mid-sized business. As the economy continues to fluctuate, businesses must be diligent in ensuring that their spending is under control and that their finances are in order. It is important to understand how to effectively manage costs so that businesses can maximize profits and remain competitive. Additionally, by recognizing areas in which cost control solutions can be implemented more money can be made available for innovative initiatives that might have otherwise gone unrealized due to lack of dedicated funding.

The first step in a cost control initiative is to identify areas of spending that are not essential. This can be done by evaluating the budget of each department, and determining which costs are necessary and which are not. By eliminating non-essential costs, businesses can save money and focus on more productive products, services or research and development. It is important to create a strategic budget that includes all areas of business operations, department by department. A strategic budget that is regularly referenced and revised helps businesses make sure they are on track to meet revenue goals and spending metrics. 

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Common Cost Control Challenges

1. Confusing cost control functions with day-to-day accounting: A business’ accounting department reports activities, while cost control initiatives are focused on analyzing spending, evaluating departmental performance, and actively seeking ways to be more efficient.  To make business decisions based on good data you need accurate, relevant and timely financials.
2. Management teams lumping annual strategic budgets in with cost control findings: Cost control recommendations and findings are based on real-time numbers, whereas a strategic budget is set in advance. When a business’ budget and real-time cost control findings have discrepancies there should be a red flag that your CFO or high-level finance business advisor can dig into to find sustainable solutions. 
3. Access to data: Financial data can come from outside vendors, and 3rd party systems as well as from internal reporting. Not all of that data will be reported the same way leaving room for misinterpretation. Having expert finance and accounting leadership can help keep the data clear and actionable. Finding a single source of truth to use to compare budget and actual is essential to making smart business decisions.
4. Cash, accrual, and GAAP: With cash basis accounting, expenses are recorded only when cash is exchanged, which can delay the recognition of an expense. Under accrual basis accounting, expenses are recorded when goods are exchanged, regardless of when cash is exchanged, which means that the expense is recognized immediately. This can give managers a more immediate and accurate picture of the company’s financial performance and enable them to better manage costs.
5. Scope creep: Without leadership in each department, businesses can run over budget without realizing it.  Regular audits of all departments and project performances can help cost control measures be proactive instead of reactive.

Cost Control Strategies

Collecting costs in a consolidated format allows organizations to make more accurate and informed projections, know where they can minimize costs, and identify areas of overspending. 

For businesses whose complexity requires multiple technologies, teams, and vendors, having cost control solutions is essential to staying profitable and ensuring that the data that is reported in the month-end close accurately reflects the costs of ongoing initiatives.

Look at your vendor relationships: Cost control and vendor management often go hand-in-hand to streamline contract negotiations, work to build sustainable relationships with vendors and customers/clients, and create partnerships that benefit both businesses.

Audit your technology contracts: Technology is always evolving and that contract you signed 5 years ago has likely crept up in price every year since you got the “new customer special”.  While changing technologies can be painful, it can cut unnecessary costs, lower inefficiencies in time and process, and potentially help you rethink the data and usage that the technology addresses coming up with a better solution for your business.

Evaluate your benefits: Does your team love Friday happy hour? How about the health coverage you offer? Are your employees taking advantage of your 401K matching? Think about what matters to the people for whom you provide benefits and you may find there are places to cut costs while actually offering the benefits your team wants. 

The goal of cost control is to give your company a powerful framework that’s designed to improve visibility and keep you in control of your costs so you can invest in the initiatives that drive revenue and innovation.

Cost Management vs. Cost Control

The terms “cost management” and “cost control” are used interchangeably. Both address processes from budget planning, cost estimation, financing, and funding to managing projects during execution. We think of cost controls as proactive and cost management as reactive or rather cost controls are implemented company-wide whereas cost management is geared more to specific projects or initiatives that are overseen by a project manager.

Cost Control

When talking about cost controls, business owners first establish a budget and then measure the variance between it and the actual cost. This variance analysis allows the finance, accounting, and department project managers to alert leadership to spikes and address issues before costs get out of control.

Cost Management

Cost management is an on-the-job process of tracking and reporting costs throughout a project or initiative.  Cost management will be the job of a project manager and often applies to industries with estimates, inventory, and measurable goods and expenses throughout the scope of work. Managing the costs of any engagement, whatever the industry, requires understanding utilization rates, overhead costs, and numbers behind your profitability metrics.

Creating a Culture where cost controls are rewarded

How can you create a culture where cost controls are rewarded in your company? Your greatest asset in the quest for better and more sustainable cost controls in your company might just be your employees.  But how do you incentivize people to be their own watchdogs?  There’s ample evidence for reward and game-based incentivizations for all kinds of activities.  Why not use some of those strategies to get your whole company to help create a cost control culture.

1. Create a cost control incentive program. Offer rewards for employees who find ways to reduce costs or save money.

2. Make cost control a priority. Make it clear that cost control is an important part of the company’s culture and that it should be taken seriously.

3. Provide training. Educate employees on cost control and how to identify potential cost savings opportunities.

4. Hold regular meetings to discuss cost control. Make cost control a regular discussion topic during team meetings or other company gatherings.

5. Recognize and reward cost control successes. Publicly recognize employees who have successfully identified and implemented cost savings initiatives.

7. Create a cost control policy. Establish a company wide policy on cost control and ensure that all employees understand and adhere to it.
8. Gamify your cost controls. Grant weekly power-ups, badges, and rewards, create avatars on a digital or physical display to show the rest of the company who is “winning” in the game of cost controls. If it’s fun, you’ll get more buy-in.

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The Upshot

When it comes to cost control solutions, there are many tools at a business owner’s disposal. Using those tools wisely to create an environment that is both efficient and effective for business growth and innovation is a balance that can be challenging. At Signature Analytics, our outsourced accounting and CFO business advisory services provide the leadership and guidance business owners need to implement accounting best practices that are cost-saving while keeping the business goals and strategic long-term objectives in mind.

If your business needs strategic cost control advice, and implementation of accounting best practices, reach out to us today.