Cost control or cost control is important in building business finances and helping increase its profitability.
Understanding how to perform cost control can help you maintain a budget for your project and increase project profitability.
This article looks in-depth at cost control, why it’s important to your business, and the best tips for ensuring that your business costs are well under control.
What is Cost Control?
Cost control or cost control is a practice used by finance professionals who analyze overall business expenses and reduce project costs to increase profits.
Typically, a company hires financial professionals to monitor their cost performance, plan budgets for each project and modify projects that can improve the business’s performance.
Financial professionals also develop, maintain, and manage project budgets from start to finish to ensure budgets are followed closely by employees.
The cost control method aims to improve the project’s financial performance while reducing project costs.
Cost control works in four main steps:
Creating standard lines
You should set a standard line to compare actual costs—based on the best achievable cost performance, improvement on previous results, or historical developments.
Prioritize more on viable options, such as increasing historical yield options.
Calculating variance
Calculate the variance between the baseline and the actual budget results. If there is an unfavorable variance, the focus shifts to that area.
It means that actual costs are higher than expected. The product will be more profitable if the variance is normal or favorable.
Variance research
Do thorough research on actual cost information and find reasons for unfavorable variances.
For example, one of the main reasons for not being profitable could be underpricing your products and services.
Applying changes
Based on the information from the analysis, advise the company on the best way to increase profitability.
For example, find new clients, implement measures to increase your conversion rate, and eliminate unprofitable services and products.
What are the Benefits of Performing Cost Control in Business?
Cost control allows businesses to maintain tight budgets, which keeps their finances stable and can help grow the profitability of their projects.
Here are some reasons why using cost control methods is important for businesses:
Budgets help businesses stay on track
The cost control method often involves setting a strict budget for the team to follow, which helps to stay on track throughout the project.
If the budget calls for the project to be completed by a certain time, employees may feel more compelled to complete the project before the budget deadline.
Keeping project costs from increasing
Using cost control methods can help keep project costs from growing rapidly as the project progresses.
Project members may consult a financial professional if they feel the budget is insufficient to cover the costs required for the project.
Keeping profitability high
The cost control method allows the revenue brought in from the project to be higher than the project cost, which keeps profitability high and improves the company’s finances.
Cost Control Methods in a Business or Project
1. Plan your budget properly
Setting aside sufficient time to develop an accurate budget for a new project is important because budgeting helps estimate costs, keep finances organized, and ensure cost differentials are relatively low.
When budgeting, businesses consider all parts of a project, including how many employees they need, how much time it will take to complete, and how much material they need to complete.
It’s important to leave plenty of room in your budget for any unexpected expenses.
For example, some projects may take longer than expected or require more materials than originally anticipated, so saving money in the budget is important for sudden changes.
2. Monitor all expenses using layered checks
Monitoring all expenses related to a project is a common cost control method that businesses use to ensure budgets are followed properly.
Businesses often have checkpoints that are analyzed periodically throughout the project to review that team members are maintaining a budget and to decide if any changes need to be made, such as if a team member requests more time or materials to complete a project.
Professionals can analyze these checkpoints weekly to monthly.
Financial professionals can analyze the necessary changes using these checkpoints and accommodate budgets accordingly.
This cost control method allows for changes that do not significantly affect the budget.
3. Using a change control system
A change control system is a cost control method that considers any changes that may have a major impact on the budget.
These changes can occur from any problems that arise during the project or significant delays that cause the project not to meet deadlines, leading to increased labor and material costs.
The change control system monitors all changes made to the project to ensure professionals make budget adjustments.
They also document changes and ensure all changes made are critical to the project.
4. Have time management
Time management is a cost control method that can reduce project expenses by meeting project deadlines.
When a project goes beyond the deadline, it can cause the overall project expenses to increase, as they continue to use materials and employees to complete the project, which lowers the project’s profitability.
5. Keep track of earned scores
Using the earned value is a popular method of cost control among accountants. This involves multiplying the percentage of work completed on a project by the budget at the time of project completion.
The value earned helps professionals predict the financial results of a project depending on the time to complete the project, the total cost of the project, and the overall cost of the project.
Factors to Consider in Cost Control
Following are some of the factors involved in monitoring the cost control of a business:
Labor costs
The amount of wages paid to employees working on a business or project, including employee benefits and taxes, is labor costs.
When budgeting a project, it is important to include labor costs, as a project may involve several employees working simultaneously.
For example, if you are creating a budget, including the total number of employees on the project and how long each employee can work, get an accurate estimate of the total project cost.
Material cost
The total cost of all supplies and equipment needed for a project is the cost of materials.
This involves ordering materials before the project begins, during project completion, and after the project is completed.
Actual cost
The actual cost is the total cost that a project must incur from the beginning to the end. This includes the cost of labor, materials, and other costs associated with the project.
Cost variance
The cost variance refers to the price difference between the actual cost of the project and the budget you have set.
For example, if you have a budget for a project of 1,000,000, but the actual cost of the project is 1,500,000, then the cost variance is 500,000 because that is the difference between the actual cost and the budget.
Use of Cost Control
Cost management is a good way to plan targeted net income. Calculate the target net profit using this formula:
Sales – fixed costs – variable costs = net profit target
For example, suppose a retail clothing store wants to generate 100,000,000 in net revenue from 1,000,000,000 in sales during the month.
To achieve the goal, management reviews variable and fixed costs and tries to lower costs.
Finding other merchants who offer competitive prices helps reduce inventory costs.
It may take longer to reduce fixed costs, such as rent payments, as these fees are usually specified in the contract. Achieving targeted net income is critical for publicly traded businesses as investors purchase the issuer’s common stock based on expectations of revenue growth in time.
Outsourcing is often used to manage costs because many companies find it economical to pay a third party to do a task instead of doing the work in the business.
Tips for Cost Control
Below are some of the most common tips encountered when implementing cost control in business:
Controlling changes
Controlling change is one of the most important aspects of cost control.
Because change will occur on every project, the project team must have all the tools and training to identify, measure, and control change.
Make sure you have enough resources.
In business processes such as conducting acquisitions and mergers, there is a collaboration between companies on one project.
This places significant pressure on the scarce resources of an organization. As a result, there are limited resources to provide reliable, accurate, and detailed reporting.
To minimize the risk of loss in your business, ensure sufficient resources for ongoing or future processes.
Report accuracy
For accurate cost control reports, collect data and analyze it extensively. Once completed, there is a need to ensure that the final information is understandable and precise.
Generating objective reports is challenging, in large part due to limited resources and a lack of appropriate information. The result is unreliable basis.
Manage customer relationships
Every business has clients or customers. Even when you only have one project, there are customers involved.
Customers are not just those who use your services or purchase products from you.
You should also ensure those with whom you have a business relationship, such as funding authorities, stakeholders, technology suppliers, etc.
This cost control process can be very challenging for any company, especially if the available resources are limited and, in the end, will not fully meet the company’s needs.
Make sure you have effective time and effort in reporting
Despite the challenges of sourcing information from multiple sources, companies spend a lot of time and effort preparing data for reporting.
Organizations have different data sources, which can be challenging when gathering this information for reporting.
This is because the scheduling and cost control system generates different data codes, which may contain errors.
Therefore, ensure you have plenty of time and best effort in creating optimal cost reporting.