Controlling Costs

August 6th, 2010

This article follows from the earlier one dated 27 July where I outlined the ANZ Business Barometer results delivered at an ANZ/BDO Focus Group I attended.

One of the key drivers identified as a ‘new normal’ was the focus on costs.

At PlanA Consulting before we even look at helping clients drive new volume into the sales funnel we look at what they are currently doing. Cost control is one of these areas.

Cost control may be either direct or indirect.

Direct cost control is looking at actual direct expenditure where those hard earned dollars are leaving your bank to go elsewhere such as the payment of creditors. Do you have robust systems, regardless of the size of your organisation to know how much money is being paid in this area?

To control direct costs do you:

  • Formally review and audit expenses on at least a monthly basis
  • Benchmark expenses against an industry standard
  • Benchmark against other areas of your own organisation if able
  • Look at your expenses as a % of turnover so you are able to identify movement away from the trend
  • Have a company policy when it comes to decision making over $x amount to be spent
  • Have a process to decide if (a) you need to spend that $ (b) how will it add value to the organisation
  • Identify how many GP$ are required to recover the cost of the spend
  • Have a budget that guides decision making

Indirect costs are harder to review and this is normally some type of activity that causes your organisation to ‘bleed’ GP$ without even been aware of it.

Indirect costs could include things such as:

  • Poor productivity
  • Cost of sales not closely monitored
  • Poor invoicing systems
  • Poor debtor recovery which increase interest or overdraft fees
  • No monitoring of expenses which allows things to slip through
  • Wastage
  • Holding too much stock or the wrong type of stock
  • Not considering alternatives before spending
  • People not been accountable for what they spend

There is an old saying that if you look after the pennies the pounds look after themselves. This applies regardless whether your turnover is $100,000 or $10,000,000.

Sometimes the smaller business has no system or process to decide what to spend and what for and the bigger business has lots of small expenditure that can soon add up over a period of time.

Regardless of where your business might be it is vital to be aware of what is happening in your business in the area of costs. It’s not much use driving more sales into your business if the money is just leaking somewhere else.

In my next article I will talk about cashflow and what impact that has on your business.

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