Becoming an entrepreneur is one of the most rigorous and rewarding experiences that someone can take part in. Unfortunately, though, most businesses don't last more than a handful of years, and part of this is due to poor financial management.
One of the best ways to properly manage your company's finances is to incorporate a solid cost control model. But, not everyone knows how to go about it (or what it involves).
Not sure where to start? Don't worry, we’ve got you covered.Let's take a look at everything you need to know.
So, What Is Cost Control?
As the name suggests, this term refers to the process of reducing costs in a way that still allows the business to perform at a functional level. At the very least, cost control aims to restrain the growth of expenses over time.
This method was implemented by a large handful of companies during the 1990s, often taking a heavy-handed approach that resulted in mass layoffs and outsourcing. The goal was to become as low-cost and efficient as possible with apparent disregard for employees of any status.
The long-term result was highly detrimental to the business, as the selling of non-essential property and mass firing of employees reduced the quality of the company's production. This made it impossible to secure a larger share of the market or give the company a competitive advantage.
A notable figure in this era was known as "Chainsaw Al" (Albert J. Dunlap) due to his tendency to eliminate anything that wasn't absolutely required to run the company. By taking this 'skeleton' approach, Dunlap claimed that the extra finances saved from outsourcing and layoffs could be reinvested into the company for further growth and productivity.
After two years acting as CEO for appliance manufacturer Sunbeam, though, he was promptly fired due to the poor results his strategies provided.
(Modern tried-and-true cost cutting methods offer a safer option than gambling away your entire business on outsourcing.)
What Is The Purpose of Cost Control For Small Businesses?
Although the goal of most businesses is to expand, small businesses and larger companies must do so in different ways. So, a smaller company with a total of seven employees is highly unlikely to benefit from mass layoffs.
Fortunately, there's a handful of ways that small businesses can implement this form of cost reduction in a reliable and efficient manner.
Listed below are key parts of the process.
The Hiring of Internal Employees
Proper cost control begins with hiring the right employees for your company. Since recruitment is often an expensive process for most companies, hiring an inept worker or someone who doesn't function properly in your workplace culture can cost even more.
You'll also be able to decrease the likelihood of necessary layoffs in the future since employees who are the right fit for your company will often be too essential to let go. This will likely lead to another form of budget-cutting instead, which means your quality employees will still provide outstanding performance.
Depending on the size of your company, you may even need an accountant whose role is dedicated to cost control. If you hire an experienced professional with a solid background in managing company finances, the payoff from the hiring expenses will be more than worth it.
Vendor Contract Negotiation
The art of negotiation is something that has a significant impact on your company's ability to manage costs. As you may expect, poor negotiation can result in agreeing to long-term contracts that put the buyer at a strong disadvantage.
A typical scenario involves a smaller company being unable to reach a reasonable agreement with a vendor and then signing the contract anyway. In some cases, client-vendor agreements last for years at a time.
A simple way to improve this interaction is to push for annual rate renegotiation. This will give you the opportunity at the end of each year to push for lower rates or different terms for your orders.
As long as your end of the relationship is in good standing (payments made on time, clear communication, etc.) then it's unlikely you'll encounter any issues.
While it's not a choice that people immediately see as obvious, cloud computing can provide two strong benefits for businesses:
- Allowing employees to access data from remote locations
- A reduction in overhead costs
With remote work becoming both more frequent and accepted in corporate culture, it makes sense to allow some employees to work from home or another location if possible.
As a result, you'll be able to maintain (or downsize) a smaller office space than you would if you constantly had every member of your team in the building at once.
You'll also be able to create a disjointed schedule for your employees— your in-house team could work during typical business hours while your remote team could work on their own schedules as long as deadlines are met.
This type of software is also ideal for cost control itself, as reports and analyses can be conducted at any time from any location.
Build Rapport With Your Suppliers
As with developing strong negotiation skills, you'll also need to develop a strong relationship with your suppliers.
Since the relationship you have with them is strictly business-related, an easy way for you to cultivate this bond is to pay invoices as soon as possible. When you show that you're financially reliable (and also respect that vendors need their money too), you'll make a strong impression on your suppliers.
An indirect but considerable benefit of building a strong business-supplier relationship is the leverage you'll gain when negotiating. This is especially true if your behavior as a client is remarkable compared to their others.
You can think of this type of behavior as a 'social business credit score' in the sense that building rapport with your suppliers will open up new opportunities for you down the road.
What Benefits Does Cost Control Provide?
At first, the only tangible benefit that cost control provides may seem to be saving money. But, there are notable benefits if it's properly implemented.
Let's dive in.
Proper cost control will lead to a stronger, more efficient company. Over time, this will allow you to scale at a faster and larger rate, further increasing your business's revenue.
Here are some of the most outstanding ways cost control can benefit your company.
When running a business, debt is almost always required. This is especially true for the average entrepreneur who likely doesn't have a large amount of cash in a savings account to build capital with.
Lower and fewer costs will allow you to minimize your company's debt, which in turn increases its overall value. You'll also free up a large chunk of finances that you can reinvest into your business.
As previously mentioned, poor financial management can lead to a company going out of business, and this is often the result if accumulating unmanageable debt.
With more money at your disposal as a result of proper cost control, you'll be able to increase your budget in other areas.
In order to get the most payoff, a budget increase in both marketing and advertising will likely generate a significant amount of profit. This is especially true if your company's product or service has already been established with its audience.
For example, you may own an athletic apparel company with a medium-sized audience you've been cultivating for the past five years. Since you have a strong idea of exactly who's most likely to buy your products, you can allocate more money toward getting your products in front of the eyes of your audience.
You may even be able to add to your sales team (or start one) for even more efficiency.
In order to get a business loan with decent terms, you'll need to have a low debt-to-equity ratio. While you may have debt due to equipment, property, etc., reducing your ongoing expenses can help improve this metric.
A business with a high credit rating is able to secure more money through loans, which can then be invested in the company in the form of purchasing inventory, equipment, etc.
Over time, this will help your company scale, and it all starts with properly managing your expenses.
With more money to invest in hiring quality employees, purchasing new equipment, and otherwise improving the way your company is run, you'll gain a significant competitive advantage over other businesses in your industry.
For those who are looking for investors or someone to sell their company to, this is a characteristic that will give you plenty of leverage during negotiations.
The company itself isn't the only thing to benefit from proper cost control— your employees will see significant benefits themselves. This will lead to increased productivity and performance of your business as a whole, which then results in more revenue.
Here are a few benefits to keep in mind.
When your company is performing well and growing, people will be proud that they work there.
The growth will not only give them a sense of fulfillment due to their hard work, but it will also allow them to envision a better future at the business. People are far more likely to work hard when their performance can bring them new perks, a higher position, etc.
Put simply, employees who enjoy coming to work every day are one of the most valuable assets that a company can have. Implementing cost control can help you make this a reality.
Of course, the old adage is still true— money talks. When it comes to employee productivity, it talks a lot.With more money to allocate as a result of cost control, you'll be able to give your employees bonuses, raises, or create an entirely new position for someone to fill. More money almost always directly translates into a greater sense of accomplishment, which is then reflected in the work your employees do.
Hire Better Workers
If your internal team is already accounted for or you're still in need of more productivity, you may need to hire new employees. A larger hiring budget will always lead to securing more experienced employees, as most experienced workers have a salary 'floor' that they won't go under.
This is especially beneficial when hiring for management or director-level positions, as someone with a high amount of experience in these areas will benefit your entire roster of employees as a whole.
Other Benefits of Cost Reduction
While the above are the main segments of a business that cost control provides benefits for, there are also a few miscellaneous ways this process can help your company.
Budgeting, for example, can highly benefit from proper cost control, as it will give you a realistic look at your expenses and help you determine what numbers you need to hit when it comes to productivity.
In turn, thorough budgeting will also help you identify outstanding areas where you can reduce expenses.
Cost control also aids in developing key performance indicators for your company. Since you'll know exactly what long-term numbers you need to hit in order to reach the profits you desire, you can break these down into shorter milestones.
So, all it takes is checking your monthly or quarterly performance to see if you're on the right track.
Properly Implementing Cost Control Can Seem Difficult
But it doesn't have to be.
With the above information about cost control in mind, you'll be well on your way to ensuring that your company's finances are managed as efficiently as possible