Welcome to my final article (for now) on Cash flow management. We will take a brief look on the area of cost control.
Control your costs
Can you influence how much customers spend with you? Maybe, but you can control your costs.
Unlock the potential
So what types of costs are we dealing with?
There are two types of costs – Variable and fixed.
Variable – Change in relation to activity i.e. the amount you sell or supply. Examples include stock, postage or delivery costs, etc.
Fixed costs as the name implies remain constant in the short term regardless of sales. Examples include rent, bank charges and so on.
How do you do it? — Know thyself!
What is the complete picture of the costs required to execute a given service?
Firstly write down all of your costs and decide if they are fixed or variable. This will enable you to establish exactly how much you are spending each week/month and what you are spending it on.
The next step is to reduce them. Yes, it can be done, set a realistic target of between 10-20%. Remember – anything saved immediately means more profit for your business.
Variable cost reduction
Variable cost can be changed quickly thereby increasing your profit almost immediately.
Simple cost-saving measures include sending invoices and delivery notes by email instead of printing them or only providing them if requested. This saves on paper, printing and postage costs.
Fixed costs reduction
Cutting back on your fixed costs might take a little more time, but they can result in greater savings, so they should not be ignored.
The target should be to reduce all costs, so challenge everything you are spending. It might take a lot of effort, but can result in huge savings.
- Be harsh
- Be ruthless
- Negotiate hard
- Challenge all so-called ‘fixed’ costs
- Don’t be complacent
Keeping tight control of your costs will enable your business to stay lean and efficient. It can also help you to beat your competition.
To do list
- Identify your major costs, such as staff, raw materials and other supplies, premises, utilities, travel, transport, capital expenditure and financing costs.
- Decide which costs to control centrally and which should be the responsibility of individual cost centres (e.g. production, sales).
- Involve employees by explaining what you are doing and encouraging cost-saving suggestions; consider offering incentives.
- Establish cost budgets and monitor actual costs against budget as part of a systematic cost-control process.
- Review how activities and costs contribute to achieving your business objectives and quality standards.
- Benchmark key activities and costs to identify long-term opportunities for significant cost reductions.
- Consolidate purchasing with a small number of suppliers and negotiate improved terms and discounts; check invoices for overcharging.
- Eliminate unnecessary activities, duplication of effort and unnecessary waste; reduce obvious overcapacity.
- Control excessive costs – for example, over-specified supplies, or always using first-class post.
- Identify opportunities to improve efficiency; use technology where appropriate and consider outsourcing non-core activities.
- Design products and production to use standard components and efficient processes; improve quality control to minimise waste.
- Improve financial control; refinance expensive overdrafts with loans and minimise working capital.
- Before making any changes, assess the potential downside, such as damaging morale, reducing quality or creating long-term vulnerability.
- set budgets and monitor actual costs
- focus on how activities and costs contribute to your objectives
- negotiate purchase prices
- involve employees
- skimp on costs that are necessary
- leave yourself without any flexibility
- fail to invest for the future
If you need help in benchmarking, budgeting and cash flow forecasting do not hesitate to ask us BW Business Analysis Services will be happy to help you.
Why not use a one page plan each month to measure and improve your business performance?