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| Cost control |
Cost Control
Cost control is basically a practice of identifying, analyzing and managing the expenses of a business to increase its profits. From the definition above it is clear that there are three very important steps in cost control
- Identification of Costs
- Analysis and assessment of cost
- Cost management
Knowing your cost is very important for any business it has direct impact on your pricing decision which may affect the profitability. In todays’ dynamic environment knowing your cost help us to bring the required flexibility to respond to the changes. As a first step to know your cost we need to identify the cost centers (a cost centre is a department which consume resources and contributes to the profitability indirectly.) examples may include sales and marketing department, accounts, finance, HR department, administration and or research and development.
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After identifying the cost centres we need to identify the major costs associated with the with each cost centre. The costs may include utility bills, material purchase, salaries, training of employees, advertising costs travelling costs, legal cost for compliance etc. After knowing our cost centres and major costs associated with them we now have to analyse these costs we need to understand the trend and benefits achieved from these costs. We need to make sure that the cost being spend by the cost centre is justified on reasonable grounds. (it is better if we can link the cost with the activity or the cost driver it will help us to understand the relationship between cost and activity.)
In analysis we need to understand the impact of each cost on our business we need to keep in mind the irrational cost cutting may have adverse effect on the business. Understanding the behavior and nature of cost is of prime importance it may happen that management is focusing more on controlling the non controllable costs which results in no productive output rather it adds to the more cost. Only those costs should be focused that are controllable. We should be in position to identify the non value adding activities and costs associated with them and by eliminating such non value adding activities we can control our costs.
In order to cut the cost we need to understand the objective of the business. The objective of the business could be quantitative (e.g to achieve $ 5 million increase in sales over the next quarter) or it could be qualitative (e.g to open 10 new out lets in a month) sometime companies may use the mix of qualitative and quantitative objectives (company may wish to increase of sales by 5% and it will open its outlets in new areas to target more customers.)
By considering the objective of the business there is then need to establish or set up the standard cost. Standard cost is what a product should charge in an ideal or most appropriate environment or circumstances. After establishing the standard cost we set up the budgeted cost. The major difference between budgeted and standard cost is that a budget usually refers to a department's or a company's projected revenues, costs, or expenses. A standard usually refers to a projected amount per unit of product, per unit of input (such as direct materials, factory overhead), or per unit of output.
(A budget usually refers to a department's or a company's projected revenues,costs, or expenses. A standard usually refers to a projected amount per unit of product, per unit of input (such as direct materials, factory overhead), or per unit of output.) (definition copied) Setting up budget is a detailed topic but setting of budget varies according to the leadership styles, type of industry, type of competition an industry is experiencing and other factors. At first the budges should be imposed or top down so that every element is considered and with passage of time and experience of employees it may be allowed to evolve as participating budget. In the end we need to record our actual results which are then compared with standard and budgeted costs, deviations are found out and there could be two types of deviations or variances
- Some costs will be higher in the budgeted and lower in actual results (provided quality and other factors have not suffered) such variances or deviations are considered to be favourable. These will be the strengths of the company and company may use these strengths to get competitive advantage over others.
- The other scenario could be that actual cost are higher than the budgeted ones. (provided other factors are same) such variances and deviations are non favourable. These will be called as our weaknesses and they are needed to be addressed so when the weaknesses are addressed they should be converted to strengths of the company.
The process of performance appraisal is a continuous process and it must be performed regularly. Other simple costs Some costs can be reduced by little efforts and they require very few resources to be controlled e.g
- The company could be receiving invoices from its suppliers with arithmetic errors, discounts not entertained such invoices should be checked properly.
- Company might not be taking advantages of bulk discounts available in the market. It is advisable that EOQ should be established and discounts should be availed if feasible.
- The purchase department of the company and its processes should be evaluated to check if they are buying from the best option available.
- Company might introduce GO GREEN policy to force it employees to limit the use of unnecessary paper and other items. ( sometimes GO GRREN may cause additional cost to be incurred)
- Renegotiate the terms with the suppliers and the customers as per the requirement of the company. Sometimes getting more credit days from suppliers is feasible then the discount offered by them for early payment such options should be checked carefully. Similarly it is advisable to get payment from the customers as early as possible provided that the sales are not suffering. Again such options should be clearly studied.
- Some time it is feasible to use out sourcing facilities available in the market e.g it might be feasible to outsource the accounts then to have a proper accounting department which for the time being might be costly. Similarly now a days companies or outsourcing their credit control department to credit control agencies for early recovery from accounts receivables. ( these options should be studied in details as they might have effect on the reputation of the company after careful analysis decision should be taken)
- Company can cut cost by saying NO to luxurious services it is getting for its employees e.g instead of business class travel ticket it may offer an economy class ticket only. Similarly instead of offering the stay at 5 star or 7 star hotels they may be offered to stay in a normal economy class.
- Company must review it financing options on regular intervals it happens that sometimes companies are ignoring this area it is highly advisable that the short term borrowing should be used for short term investments and long term borrowing should be used against long term investments.
- Companies can cut their cost by offering energy efficient cars to their employees specially in gulf countries people tend to buy off road and heavy cylinder vehicles which are less energy efficient and even their maintenance is expensive.
Controlling the cost is based on the idea that how well you know your
cost. The better the understanding about the cost and its behavior the
better the control will be. It is extremely important to note that every
cost cut has some negatives also, so cost cutting should be evaluated
very carefully before being implemented.
I have written this article based on the knowledge and little
experience I possess. I will welcome any idea or positive criticism that
will or may contribute towards my learning.
I thank you for your precious time.
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The Author: Abdul Rehman
About:
Senior Finance Officer
-Resourceful and experienced accounting & finance professional possessing experience of 5+ years in managing accounting operations, budgeting and auditing; proactively assists senior management while overseeing accounting teams
-Performance oriented individual capable of handling accounting activities including bank reconciliations and book keeping for various projects simultaneously; adept at preparing financial reports and utilizing ERP & SAP to ensure efficiency
-Effective team leader coordinating with cross-functional environments to gather and complete required documentation; holds strong grasp over preparing variance analysis to highlight discrepancies and suggest appropriate improvement.
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