15 Ideas for Effective Cost Management
Learning to control costs in business seems fairly simple on the surface: create a budget and stick to it. But the most effective cost management goes far beyond budgeting, by diving deep into analyzing why certain costs exist and what can be done to balance cost and revenue for the most profitability. Workflows, time, and cost management are all intertwined, and haphazardly cutting costs just won’t do. Instead, companies need to create a long-term growth plan that ensures the business can thrive for years to come.
Check out our list of 15 cost management techniques and learn how to be more strategic in your cost management plan.
1. Understand Your Costs
Perhaps the most important step in more effective cost management is to really understand your costs. This is more than just an analysis of your budget. When you’re seeking to understand your costs, you need to question every expense and ask yourself why the cost exists, what might change that cost, and how a change would affect your company.
2. Understand Your Revenue Structure
Likewise, it’s valuable to understand your revenue structure before you make any other steps toward strategic cost management. Where is your revenue coming from? Could your revenue be greater if you changed the structure? Ask yourself tough questions and consider innovative ways to switch up that structure.
3. Simplify Work Flows
An overly complicated workflow can make it harder to effectively manage costs. Many companies aren’t even aware that their work processes are too complicated, so it’s smart to create a flowchart detailing how it all works. Where do your parts come from? Who assembles them? What happens next? Don’t skip any step in the process. And once you’ve written out the whole flowchart, it’s time to see if you can simplify.
4. Offer Cost Management Training
No matter how much you understand cost management, your company won’t be as profitable if you don’t share your knowledge with the rest of your leadership. Offer cost management training to ensure that your entire company understands its importance in making the business more profitable. Discuss tactics relating to decision-making, problem-solving, team-building, and more. All of these traits relate to cost management in some way, and training your team will help you increase profits in the long run.
5. Get Your Employees Involved
Cost management training isn’t the only way to get employees involved in cost management. Once they understand the principles of cost management, include them in brainstorm meetings and ask for their feedback. Many employees will have valuable insights that can help you better manage your costs in ways you may not have thought about.
6. Choose Costs that Generate Profit
If you really want to effectively manage costs, you’ll need to choose the costs that generate the most profit. This technique may seem obvious to some, but it’s harder to implement than it seems. As you analyze your budget, costs, revenue streams, etc., make a list of the costs that directly generate profit. Prioritize them in terms of profitability, and stick with the ones at the top of the list as much as possible.
7. Reduce Unprofitable Work
Some unprofitable work is necessary, but you might be surprised to realize there are a lot of tasks you’re doing that just aren’t increasing your profitability in any meaningful way. Maybe you’re working overtime to add a new product line that isn’t selling well. Maybe you’re spending hours on your social media marketing, which isn’t bringing in new customers. Though some new endeavors take time to become profitable, it’s smart to reduce the unprofitable work once you realize it’s not helping your company grow.
8. Outsource Customer Service
Customer service is an essential part of any business, but oftentimes running an in-house customer service department can be relatively unprofitable. Instead, consider outsourcing your customer service needs to a reliable third party. The best customer service call centers will act as an extension of your business and can operate at a fraction of the cost of an in-house team.
9. Invest in the Right Technology
Technology is changing at the speed of light, and it can be hard for many businesses to keep up. But investing in the right technology can help your company increase efficiency and profitability over time. This doesn’t mean you should spring for every new device that comes your way, but strategically decide which technology can benefit your company. Knowing when it’s time to upgrade will be vital to the success of your business.
10. Predict Future Expenses
Your budget may be on track for now, but any unexpected costs could throw off the whole delicate balance. Instead of floating from month to month with a rigid cost and revenue structure, it’s best to predict future expenses and build them into your budget. Don’t move forward with any new initiatives until you’ve done diligent research, figuring out how much it will cost and how much revenue it might bring in.
11. Reevaluate Your Budget
Smart leaders are constantly reevaluating their budget, calling everything into question on a regular basis. What are your costs, and why do they cost that much? How did you arrive at a certain budget, and how could it be changed? Revisit your budget regularly and get input from the rest of your team on how it might be tightened up or revamped to increase profits.
12. Embrace Changes
Many of the techniques on this list require you to make changes within your business. So obviously, effective cost management requires the ability to embrace change as it comes. Holding on to old ways will only keep your company from reaching its full potential. Instead, look to the future and see every change as a chance to grow.
13. Learn From Past Decisions
On the journey to more effective cost management, you’re sure to make a few mistakes along the way. On the other hand, you’re also sure to have some wins. Either way, it’s crucial to look back on those decisions and learn from them. Take your knowledge with you as you make future decisions, and you’ll become more savvy at cost management as time goes on.
14. Infuse Cost Management in Your Company Culture
Cost management may seem like a dry topic for your accountant to worry about, but it’s really the lifeblood of your business. If you really want your company to thrive, infuse cost management principles into your company culture. You’ll be even more profitable than you thought possible when you have everyone in your company on board.
15. Keep Your Business Plan in Mind
As you make decisions relating to cost management, you should always be weighing them against your strategic business plan. This plan is like a road map for what your company is all about and how you’ll get there. Don’t lose sight of your business objectives and vision as you make choices about how to manage costs.
Your Journey to Strategic Cost Management
These 15 cost management techniques will help you reduce costs and increase profits. You’ll become better at implementing these techniques over time, so keep at it and be patient as you see your business change for the better.