What is cost control? Definition & tips to boost profitability

All companies incur business expenses, but 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 to improve your financial performance.

‍

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

‍

In this article, we offer a detailed explanation of cost control and why cost control is so important for small businesses. We also offer 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 taking corrective actions to track your business spending and ensure your working capital is deployed efficiently. Cost control is sometimes also called expense control.

‍

Some examples of cost control or expense control include:

• Placing restrictions on travel and entertainment employee reimbursements
• Renegotiating contracts with vendors for lower prices
• Bringing on automation software to drive efficiencies
• Outsourcing marketing, accounting, or other functions
• Cutting programs or project costs from your budget

‍

Cost control is a subset of cost management, which more broadly encompasses planning, estimating costs, budgeting, and controlling costs and expenses..

Cost control steps

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

• 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.

‍

To illustrate, let’s say 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.

‍

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 save via cost control, the higher your profits, which you can then reinvest into your business and employees.

‍

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 tips for improving expense control in your business

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

‍

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

1. Start with your budget

The first step in the cost control process is creating a budget that accurately and realistically details your expected income and expenses for the period. If your goal is to cut business expenses, start with forecasting how to spend money over the coming month, quarter, and year. 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. 

‍

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 budgeted costs. 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. 

‍

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

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.

‍

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

‍

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

• 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 in advance, 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:

• 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 costs, 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

‍

By properly categorizing your expense allocations, you gain insights into your company’s spending, including which categories account for the most spending and how spending in each category changes over time. This helps you identify areas where you can scale back on spending and more accurately account for resource planning.

‍

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.

‍

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.

‍

Manually managing your expenses is time-consuming, so 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 everyone 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.

‍

For effective cost control, 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:

• Multiple subscriptions with a single 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 the total cost. 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:

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

‍

These documents should clearly outline:

• 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

‍

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 a “set it and forget it” strategy for your business. It’s an ongoing process. You can find easy ways to cut back and become more profitable by consistently monitoring and tracking business expenses.

‍

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:

• 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

‍

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.