Cost control: Definition and tips to improve profitability

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If you aren’t actively controlling your business costs, you could be leaving money on the table. 

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While all companies will naturally incur business expenses, that doesn’t mean you shouldn’t think critically about where every dollar is going. After all, every dollar you spend is a dollar you can’t count as profit or reinvest in your business.

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In this article, we’ll offer a detailed explanation of cost control and why cost control is so important for small businesses. We’ll also give you six cost control tips that you can start using today to maximize your company’s potential for profit.

What is cost control?

Cost control is the process of evaluating and reducing business expenses to increase profit. At its core, cost control is about tracking your business spending to ensure your working capital is deployed efficiently. Cost control is sometimes also called expense control.

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While there’s no set process that every business follows, cost control typically involves:

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• Establishing a budget for your business or project
• Estimating costs for a given timeframe (typically quarterly or annually)
• Identifying costs that can potentially be eliminated or reduced
• Tracking business expenses as they’re incurred
• Comparing actual costs to budgeted amounts and refining the process for future estimations

The difference between a cost and an expense

A cost is the price paid for raw materials, labor, or a particular asset. Accountants use the term cost when planning production or creating a budget. When a cost is posted in the accounting records, it becomes an expense.

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To illustrate, let’s assume you’re a furniture manufacturer. You purchase $10,000 of maple wood as a raw material to produce doors. The wood is a cost, and you budget for the cost of each door by adding in labor costs and overhead costs.

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When you use the wood to manufacture doors, you record $10,000 as an expense for maple wood. The revenue from the door sale is matched with the wood and other expenses to determine the profit.

Why is cost control so important?

To understand why cost control is so important, we need to look at the formula for calculating business profit:

Profit = Revenue - Expenses

While there’s no doubt that maximizing revenue is important, limiting your business expenditures is also critical—after all, that’s the only part of the equation that’s under your direct control. The more money you can save via cost control, the higher your profits, which you can then use to reinvest in your business and employees.

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Likewise, lowering your business expenses by avoiding overspending allows you to charge your customers less for your products and services without compromising your quality or profit margin. In other words, cost savings can be a competitive advantage, helping you attract new customers while retaining your existing base.

6 ways to improve expense control in your business

How you approach cost control and expense management will depend on your company’s unique situation and existing workflows. Small businesses where just a few people handle all spending, for example, will have a much simpler time with expense control than larger businesses with dozens or even hundreds of employees incurring expenses.

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While there’s no one “right” way to control costs, there are some tried-and-true strategies you can use to optimize your spending habits regardless of your business’s size or complexity:

1. Start with your budget

If your goal is to cut business expenses, you need an idea of how you plan to spend money over the coming month, quarter, and year. That means creating a budget that accurately and realistically details your expected income and expenses for the period. When you know how your business intends to deploy capital, it becomes easier to prioritize the expenses and initiatives you believe will truly move the needle while deprioritizing everything else. 

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Of course, creating a budget will only get you so far. It’s also critical that everyone in your organization sees the importance of sticking to—and improving upon—your budget. You can gain buy-in by including all your organization’s key stakeholders in budget talks. This should include your finance team, project management team, and department heads. 

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Once you’ve set your budget, make sure all your employees understand how their actions and purchases have the potential to make or break your company’s budget.

2. Monitor your expenses

When do your employees submit expense reports and reimbursement requests? If it’s once a month—or worse, once a quarter—that means those expenses aren’t represented on your balance sheet. This makes it hard to tell whether you’re staying on budget.

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The good news is that modern financial software can eliminate this lag. Tracking business expenses in real time improves cash flow, increases transparency, and lets you see how your actual costs are stacking up against your projections.

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Some steps you can take to implement real-time visibility include:

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• Using corporate cards: When employees make a purchase with a corporate credit card, the expense is immediately reflected in the income statement
• Pre-approving employee expenses: When expenses are approved before they’re incurred, there’s no delay in waiting for an expense report
• Shortening expense submission periods: If you currently require employees to submit expense reports once a month, consider requiring them on a weekly or biweekly basis

3. Categorize your expenses

There are many ways you might slice and dice costs into different expense categories. Some important expense categories to know include:

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• Deductible business expenses, which you can claim on your tax return to lower your tax burden each year
• Non-deductible business expenses, which don’t count toward your deductions
• Recurring business expenses, like subscription payments, which occur on a regular, repeating schedule (weekly, biweekly, monthly, quarterly, or annually)
• Fixed business expenses, like rent or lease payments, which remain stable over time
• Variable business expenses, such as travel spending and utility bills, which fluctuate over time
• Direct expenses, like material costs, which are directly tied to a product or service you provide to your customers 
• Indirect (overhead) expenses that aren’t directly tied to creating a product or service

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By properly categorizing your business expenses, you can gain a lot of insight into your company’s spending, including which categories account for the most spending and how spending in each category changes over time. This can help you identify areas where you can scale back on spending.

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For example, if you see that travel expenses account for the majority of your business spending, you might decide to take measures to cut spending by half—perhaps by consolidating multiple business trips into one, or limiting the number of team members who go on each trip.

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Likewise, you can drill deeper into those costs and identify subcategories—mileage, airfare, lodging, food, and entertainment—for a more granular understanding of where you’re spending the most money.

4. Automate your expense approval process

Automating your company’s expense approval process not only streamlines your workflows, it also helps cut down on excess spending by fairly and consistently enforcing your expense policy. Modern expense management software allows you to restrict or outright block spending in certain categories or up to a certain dollar amount. You can also set spending limits at the individual, department, or vendor level.

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On top of that, automated expense reporting and approvals free up time for everyone involved—not just the employees submitting reports, but the team members reviewing and approving them, too. This gets them back to their core job functions more quickly and lets them focus on driving growth.

5. Take a closer look at SaaS vendor spending

As businesses grow, it’s common for different teams and departments—product, marketing, sales, finance, and IT—to become increasingly siloed. If you aren’t keeping an eye on software spending, you could wind up with redundant tooling that can unnecessarily inflate your business’s SaaS costs.

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With this in mind, it’s a good idea to take a hard look at your SaaS vendors to determine whether it’s really necessary and cost-effective to continue paying for each service. Common issues that a vendor spend analysis can reveal include:

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• Multiple subscriptions with a single vendor: Do two (or more) teams in your organization have their own contracts with the same SaaS vendor? Consolidating to a single subscription can give you a leg up during contract negotiations and potentially lead to savings.
• Tools with functional overlap: As SaaS providers grow and add new capabilities to their core offerings, you may find that you no longer need to pay for two separate tools because a single tool can now do the job of both
• Unused seats or licenses: Unused seats are a common problem that can inflate company spend. Right-sizing your subscription to account for actual usage can lead to thousands of dollars in savings.

6. Outline everything in your expense policies

Cost control isn’t always easy. Achieving success requires all your employees to work toward the same goal of reducing unnecessary spend. That’s why it’s so important that you document and outline your processes and expectations in your company policies, including your:

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• Expense policy
• Reimbursement policy
• Travel and expense (T&E) policy 
• Corporate credit card policy

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These documents should clearly outline:

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• Which employees are allowed to make purchases on behalf of the business 
• What counts as an eligible expense 
• Timeline for submitting expense reports 
• What documentation is required
• Spending limits

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To ensure compliance, you should update and distribute the document anytime you change or adjust your policies.

How Ramp helps you get cost control right

Cost control isn’t something that you do once and then forget about. It’s an ongoing process. By consistently monitoring and tracking business expenses, most companies can find easy ways to cut back and become more profitable.

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Ramp’s modern finance platform gives you the tools and visibility you need to take control of your business expenses. Ramp’s all-in-one solution gives you:

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• Unlimited physical and virtual corporate cards with pre-approved spending categories and limits, helping you control spend in real time
• Automated expense management software, including expense reporting and reimbursements, receipt capture, mileage calculations, and more
• Integrations with your existing tech stack, including accounting software, collaboration tools like Slack, and ERP solutions
• Intelligent recommendations for where you can reduce spend based on millions of similar financial transactions

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Want to learn more about how Ramp can help you control expenses? Watch a demo video and see why Ramp customers save an average of 5% a year.