Running a business may not be as easy as it seems. In order to run a successful business it is important to understand in a business, how can expenses be controlled to improve revenue.Â
If your financial management system isn’t well-organized, merchants might find it tough to keep their business costs and expenses in check.
Fortunately, there are measures for controlling costs and expenses that you can put in place to steer clear of financial worries and boost profitability.
What is cost control?
The initial step to tackle negative spending habits in your business is to take proactive steps to control costs.
Cost control involves estimating, identifying, and reducing expenses by using a flexible budget that can adjust to any financial changes. The main goals of cost control are to enhance cash flow and increase revenue for your business.
Cost control techniques usually consist of five steps:
- Planning your budget
- Monitoring expenses
- Utilizing change control systems
- Managing time effectively
- Tracking earned value
By implementing effective cost control measures and systems, your business can gain access to valuable insights to make better-informed financial decisions.
Cost control vs cost management:
Because cost control and cost management work together closely, they are often mixed up or used interchangeably, but there are some important distinctions between them.
Cost management usually focuses on the planning stages of budgeting — such as cost estimates, financing options, funding, and similar aspects. On the other hand, cost control kicks in during the execution phase of these budgets and involves management strategies to prevent costs from surpassing budgetary limits.
What is expense control?
Apart from cost control and cost management, expense control is also vital for keeping your business financially on course throughout every project.
Expense control concentrates on promptly adjusting spending, using insights from cost control analytics, to uphold budgets and keep projects on target.
Before diving into mastering expense control and effectively monitoring expenses in your business, it’s essential to grasp the distinctions between direct and indirect expenses.
Direct vs indirect expenses:
As the name suggests, direct expenses refer to costs associated with specific items or services directly linked to a project. These can include labor, manufacturing supplies and equipment, or other materials directly used.
On the other hand, indirect expenses are general business costs that might relate to your ongoing project or other business operations. They can encompass employee salaries, rent, utilities, office supplies, business-related materials, and various professional services.
It’s important to include both indirect and direct expenses in your budgets, as they encompass fixed and variable costs that can significantly influence your cost control efforts.
How Can Expenses Be Controlled To Improve Revenue?
Now that you understand all the factors involved in controlling costs within your business, you can take the necessary steps to enhance these efforts.
Here are 8 tips to help your business improve its costs and expenses:
- Create a cost-effective budget
- Monitor and measure expenses in real-time
- Identify KPIs
- Establish a contingency plan
- Use change control systems to document variations
- Implement an efficient data collection process
- Maintain clear communication across departments
- Automate the cost control process
How can expenses be controlled to improve revenue?
By following the below 8 steps can help you control the expenses which helps you improve the revenue:
1. Create a cost-effective budget
In any project, controlling costs involves adopting a budget that prioritizes cost-effectiveness, limiting unnecessary spending, and keeping within financial constraints.
Businesses should thoroughly analyze actual figures and data from past projects instead of relying solely on rough estimates. This approach can be highly beneficial when aiming to control costs.
Another option is implementing a zero-based budget, which enables merchants to scrutinize each expense to determine if it’s justified or unnecessary for the project’s overall success.
Regardless of the budgeting approach you choose, it’s important to allocate additional resources for expansion opportunities, unforeseen risks, potential variations, project delays, and other eventualities.
2. Monitor and measure expenses in real-time
Once a cost-effective budget is established, merchants can actively manage their expenses to ensure they remain within the parameters of each project by closely monitoring expenditures and analyzing real-time data.
Monitoring costs and analyzing cost-related data in real-time enables prompt action to be taken upon noticing any cost discrepancies.
Businesses can monitor and control costs in real-time by implementing project milestones, reporting standards, and control standards:
- Project milestones: Milestones act as checkpoints, aiding merchants in closely monitoring project progress and assessing expenses incurred for better decision-making as the project progresses.
- Project reporting standards: Reporting standards help maintain an organized approach to reporting budget benchmarks, current expenses, and pending budgets.
- Project control standards: Control standards provide insights into project timelines and budgets, offering a clearer understanding of the project’s stage, expenses disbursed, and realistic project forecasts.
These monitoring and measurement tactics for cost control also help businesses identify significant performance metrics to better evaluate project progress.
3. Identify KPIs
Key performance indicators (KPIs) are predefined metrics used to assess performance throughout a project, determining if milestones and goals are being achieved.
When crafting a budget, it’s essential to clearly define KPIs and refer to them regularly during projects. By pinpointing KPIs, merchants can gauge whether they’re meeting crucial benchmarks, effectively managing costs, and maximizing savings.
Here are some common KPIs:
- Operating cash flow/budgeted cash balances
- Product sales
- Materials
- Labor
- Sales expenses
- Costs of Goods (COGS)
- Inventory turnover
- General & administrative costs
Although KPIs may vary depending on budgets and project objectives, they universally serve to hold teams accountable, enhance financial performance, and may even spark valuable cost-saving ideas for companies.
If KPIs indicate poor performance, your business should make necessary adjustments to enhance cash flow and cost control.
4. Establish a contingency plan
Including a contingency plan in your budget is another crucial aspect of cost control, as it allows you to foresee various risks and scenarios that could derail projects.
Contingency budgets typically set aside extra funds and resources to be used in case of unexpected events or emergencies. These plans also involve protocols and actions to effectively address such situations and minimize any associated risks or damages.
Merchants can develop a comprehensive contingency plan by following these steps:
- Identify the risks your business faces.
- Assess the likelihood of these risks occurring.
- Prioritize risks based on their severity to address the most critical concerns first.
- Develop an action plan to prevent, address, and mitigate risks.
- Allocate funds and resources for a contingency budget.
- Seek approval from internal and/or external stakeholders.
- Clearly communicate contingency plans to relevant departments.
- Regularly review and update contingency plans as needed.
When properly implemented, contingency plans provide a safety net for businesses to handle project setbacks and prevent the depletion of crucial expenses that could impact cost control.
Anticipating changes also helps businesses create effective contingency plans to address challenges such as fluctuating inflation rates, increasing material costs, shortages, pandemics, and more.
5. Use change control systems to document variations
To manage costs effectively, it’s crucial to keep track of variations that could alter or disrupt your projects and budgets.
Utilizing change control systems during projects helps businesses document variations and effectively adapt to these changes.
Change control systems typically involve five steps aimed at actively managing changes or change requests throughout projects:
- Initiation of change request: A change is requested during a project.
- Change request evaluation: The change request is reviewed, and a decision to approve or deny the request is made.
- Change management strategy: A comprehensive strategy is developed to address and support the change during the project.
- Change implementation: The change is introduced, usually in phases, and the management strategy is put into action.
- Closure of change request: The change is reviewed and evaluated to determine its success. The change initiator signs off, and the process is closed for future reference.
If successfully implemented, change control systems can lead to increased adaptability, teamwork, productivity, and better cost control.
6. Implement an efficient data collection process
In any project, having an efficient data collection process is a valuable asset for merchants to consult, providing a more accurate view of their progress and spending habits.
Consistently gathering and analyzing data can help merchants manage costs effectively and identify any necessary adjustments to keep projects on course.
Ensuring an effective data collection process is crucial for a project’s success, but it’s pointless if the information is inaccurate. Merchants can enhance data accuracy by leveraging digital solutions that automate the collection process and support various measurement methods.
7. Maintain clear communication across departments
Internal operations play a crucial role in project management and effectively managing costs, making cross-communication between departments essential.
To ensure a direct and clear communication channel, your business should establish company-wide communication strategies and protocols to keep projects and budgets aligned.
Consistent communication is vital for addressing budget changes, sharing pertinent analytics and data, and mitigating any project disruptions. This enables businesses to strengthen their cost control during projects, ensuring expenses are utilized appropriately.
8. Automate the cost control process
Automation is an invaluable digital tool for cost control and efficient budgeting.
Businesses can leverage cost control automation to bolster their cost-reducing strategies, streamline expense management processes, facilitate data collection, reporting, cost tracking, profitability control, and more.Â
Here are some common automated software tools for cost control:
- Enterprise resource planning (ERP) systems: These systems help businesses manage and integrate various internal processes and operations using a single platform. By automating routine tasks and data collection, ERP systems connect different technologies—financial management, project management, inventory tracking, accounts receivable, accounts payable, customer databases, etc.—to foster better communication across departments.
- Accounting/ERP integrations: These integrations allow businesses to import cost and budget-related data into accounting or ERP software for more accurate reporting and variance analysis.
- Accounts receivable (AR) automation: AR automation streamlines payment collections, reduces manual data entry, and minimizes late payments to enhance budgeting and cost control efforts.
- Project management software: This software offers a comprehensive platform for teams to communicate project tasks, deadlines, budgets, reporting/analytics, and more, ensuring better cost control.
- Operations Management Software (OMS): OMS systems enable companies to import and store real-time data related to operational costs—labor, materials, machinery, etc.—for a more accurate assessment of allocated expenses and resources, cost estimates, project forecasts, and more.
- Business Intelligence (BI) solutions: BI solutions use real-time data collection software to import and analyze large datasets, generating reports on actual costs, performance projections, and cost forecasts. These insights aid businesses, stakeholders, and investors in making more data-driven decisions.
These software systems and budgeting strategies can help businesses improve their cost analysis and control while implementing best practices for expense management.
Now that you understand the importance of cost control methods, technology, and cost-saving ideas, you can learn about common mistakes in business spending to avoid them in the future.
Common Cost Control And Expense Control Mistakes to Avoid
When it comes to managing costs and expenses, there are numerous mistakes your business might unintentionally make.
Mistakes in cost control and expense management can range from strained vendor relationships to overlooking inventory and maintenance issues. However, it’s crucial to recognize these mistakes to prevent them entirely.
Here are common mistakes to avoid when you are planning for cost control, and expenses control:
- Failing to prioritize vendor relations
- Not investing in technology
- Overlooking indirect expenses
- Neglecting to address inventory or repair issues
1. Failing to prioritize vendor relations
Neglecting to prioritize vendor relationships is one of the most common mistakes businesses make in cost and expense management.
Maintaining positive relationships with vendors can significantly impact your efforts to reduce expenses and stick to your budget. One effective way to enhance these relationships is by ensuring early or on-time payments of invoices to avoid any discrepancies. This practice also helps your business steer clear of late payments and associated fees.
A solid vendor relationship can also be beneficial when negotiating contracts and may prompt vendors to provide advance notice of upcoming price increases, allowing your business to prepare accordingly.
2. Not investing in technology
As mentioned earlier, technology stands out as one of the most valuable tools, if not the most valuable, for enhancing cost management and control.
Businesses that overlook investing in technology are doing themselves a disservice and squandering valuable time and resources on laborious, manual tasks that could easily be streamlined with the click of a button.
Integrating new software and digital tools that prioritize improving data collection, tracking expenses in real-time, managing resources, and generating more effective reports empowers your team to make better-informed decisions regarding budgets and overall costs.
3. Overlooking indirect expenses
Indirect expenses are often overlooked because they aren’t always tied to a particular project and are generally used for operational needs and overhead costs.
Even though some indirect expenses consist of fixed costs, they may also include variable costs that can fluctuate and rise over time. Neglecting to monitor these expenses can cause your business to surpass its budget and disrupt your project.
Businesses that don’t include indirect expenses in their budgets might end up needing to dip into emergency funds to cover these costs.
4. Neglecting to address inventory or repair issues
Failing to tackle inventory or repair issues within your infrastructure can significantly impede efforts in cost and expense control.
Inventory and repair problems are inevitable, but with a proactive approach and effective management, your business can promptly and efficiently address these issues to prevent unnecessary costs.
It’s crucial to take a realistic approach to each project—collect and analyze accurate data and sales projections—to ensure you order the appropriate amount of inventory, avoiding overspending or profit loss.
Your business should remain vigilant about repairs and promptly replace any faulty or broken equipment to enhance production speed and reduce production costs.
Final Thoughts
Without proper cost control and expense management measures in place, companies may face more external threats and internal setbacks that could have devastating effects on their business.
Failure to implement cost and expense control measures can result in consequences such as overspending, depletion of resources, inadequate funds, increased instances of fraud, loss of trust and credibility, and, in the worst-case scenario, business closures.
Related: How to overcome business failure
Managing costs and expenses can seem overwhelming for many teams. Fortunately, there are various types of cost control and expense management strategies and software systems available to help prepare your budget for any situation.
In addition to the cost control tips and digital solutions mentioned in this article, partnering with an all-in-one payment provider that offers robust security, effective payment collection tools, and integrated payment solutions will enable your business to maximize its growth and profitability.
Hey, I am Sachin Ramdurg. I run and manage futuredecider.com website that helps students, graduates, and professionals, to find and decide on their future career with ultimate future career advices and future career guides. I have an overall 12+ years of career guidance experience in multiple domains which has helped multiple students, graduates, and professionals to find the best career path for their future.