Cost Control Methods for Small Businesses.
One of the known killers of business is the high cost of doing business. For the purpose of this piece, our definition of “cost is the price or amount paid to acquire a service or product.”
For entrepreneurs, the total cost of production may include cost of fixed assets, raw materials, machine and personnel, subject to the type of products or services. Overhead or operating costs include expenses to maintain the machine, salaries and wages, rent, government levies and others.
The selling price of your product or service is usually arrived at after knowing your total cost and after adding a percentage of the total cost to compensate you for your efforts and risks. This is usually referred to as the margin.
Cost controls are the methods that small or big companies usually apply on routine basis to prevent unnecessary expenses that can make their businesses unprofitable or lead to outright failure. The following cost control methods are recommended as preventive measures:
- Have expenditure limits for Officers – there should be a policy document which details the respective amounts that an Officer can approve on behalf of the company. Any amount that is greater than the limit must be referred to you or his or her supervisor.
- Regular Monitoring / Budgetary Control– Compare your weekly or monthly expenses with your budget. The Business Owner (for SMEs) may be charged with the responsibility for this. A big company will put the responsibility on the Departmental Head or Branch Manager.
- Human Resources – SMEs should employ slightly below the number required and reward generously. Most people in big organizations where there are surplus Staff hardly apply more than 30% of their capacity. High number of Staff does not translate to high productivity it is the quality, competence, and capacity of Staff that really count.
- Use an incentive to control cost. Share a percentage of the cost saved with the Units or Groups that shows periodic results. Henry Ford, the founder of Ford Motors, was recorded to have rewarded any Staff who helped him to save $1 from the overall cost of making one car. You can organize a competition for the Staff with an attractive prize to encourage cost control.
- Bulk purchase of Consumables – buying stationeries or other consumables in bulk can help to get bulk discount from Suppliers. This method can help to reduce operating costs. The only requirement is that you need a store and honest store – keepers. A fantastic example that I saw in a small business is the wife of the Business Owner working as the store – keeper. It is not, however, easy to replicate this method. You will, however, need to ensure that the store-keeper can be trusted.
- Rent – Rent is a significant cost that should be well managed. If you are not occupying your own property, avoid luxury. While location and access to your office by your Customers are critical, the cost should not be too high to such an extent that you will be “working for the Landlord or Landlady.
- Surprise Audits– Have a policy to audit the stores where stationeries and other consumables are being kept without notice. Do the same for other cost – centers such as units where the raw materials and consumables are being used. Awareness by the Staff that the surprise audit can be carried out at any time will reduce pilfering or outright stealing.
- Get rid of termites – There are employees that usually behave like termites in an organization. They regularly abuse their position and the trust reposed in them. Once they are given the responsibility to purchase goods for the organization, they freely add their own cut to the price thus adding to the operating cost of doing business. This is known as “termite philosophy”. Entrepreneurs should watch out for such Employees who behave like Termites and once they are caught, they should be asked to leave.
The primary objective of setting up a business is to make a profit i.e. the revenue should always be higher than the costs. A break-even level is a level where the revenue and costs are the same. The break-even level may be tolerated temporarily. Efforts should be made to reverse it quickly because only a profitable company can be built to last. A business that is incurring higher costs than revenue is on a sure path to failure.
Revenue should always be higher than the costs. Efforts should be made to compel the costs to conform to your plans while the revenue is allowed to soar beyond the plan.