February 15, 2024

Tips for better cost control and expense control‍

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How do costs differ from expenses?

Costs and expenses are accounting terms often used interchangeably. They both lead to money leaving your business and both do impact your various types of profits. The Financial Accounting Standards Board does not provide an official definition of costs and expenses. 

By general practice and general reporting standards, costs relate to those amounts incurred in producing goods or services for sales as well as those amounts incurred for fixed/capital assets (those items which last over a year in business use). Expenses relate to those amounts which are incurred to keep the business going each month, they are not directly related to the production of goods and services and they are incurred by the business. 

Some schools of thought lean to agreeing that costs include expenses. 

Examples of costs/expenses

Examples of expenses are:

  • Rent
  • Utilities such as electricity, water
  • Insurance
  • Marketing 
  • Depreciation

Examples of costs include:

  • Labour costs
  • Raw materials
  • Food costs
  • Inventory costs

What is a controllable cost/expense?

A controllable cost/expense is one that you have the power to influence the total value of that cost/expense. You are able to influence the various factors that affect this total cost/expense.

Labour cost is such an example of a controllable cost. You can control how much your total labour cost is by controlling the hours worked by your team, the rate per hour you pay them (maybe a top up above minimum wage) as well as the total remuneration package offered(to include benefits, vacation etc). 

You have greater control over those costs/expenses that you can influence price, usage and setting policies and procedures. These can be any costs in reality.

What is not a controllable cost or expense?

There are some costs/expenses that are seen as uncontrollable or fixed. In reality, though, I do believe that costs are generally able to be controlled. You may not be able to control the price but you can control the usage which results in your control of the cost incurred.

Utility costs are often viewed as uncontrollable, but you can in effect control usage if not the price set by the provider. In some cases, you can negotiate the price charged by the supplier as well. The same goes for rent and insurance.

Other costs such as property taxes would be controlled at a government level, and as a business owner, you do have some control/influence over government policy. There are opportunities to have some control over these types of costs.

Why is it important to control expenses and costs? 

Costs and expenses impact your profits, cash flow, and ultimately the wealth of your business. They will greatly determine how recession-proof your business becomes as well as how your business weathers turbulent seasons in business and its environment.

Effective control of costs and expenses will lead to financial growth and stability as well as increased efficiency and effectiveness in the use of your business’ resources.

As expenses and costs are controlled more frequently and in an effective process it leads to enhanced decision-making, strategic moves, improved profits and use of resources in addition to increased cash flow and reduced costs.

Disadvantages of cost control

Let’s say your organization starts to track how many pens each team member uses a week. Someone is assigned to set up a spreadsheet and keep a record of the type of pen, the date it was received and the date a new pen is requested. The costs involved in the process outweigh the value received. 

There is also a focus on the wrong costs to reduce total costs. The costs of pens are immaterial in the great big picture of costs in the organization. The tracking of pen usage could be eliminated and those resources used in a more effective way in the organization.

Another example is tracking how many rolls of tissue are used weekly in an organization. Again this would be an overbearing process that would not only be uncomfortable, it would not add great value to the organisation overall.

Cost control when executed in the wrong way can lead to a lack of growth and development within the organization. It can result in a lack of urgency to spend and incur important costs.

It also can lead to a focus on dollar amounts instead of value received when costs/expenses are incurred. 

Cost control when done wrong can lead to wrong decisions being made as unreasonable restrictions throughout the organization.

The value received from controlling costs should outweigh the cost of the cost control process.

Three steps to take control of costs

“Not all costs are equal”

An integral component of cost control is understanding how specific costs/expenses affect your profit. Not all costs/expenses will impact your profit in the same way, as such it is important to focus greatly on those costs that affect your gross profit(sales less cost of sales) in a greater way. 

Cost management steps:

  1. Identify costs: This process involves being clear on what are all the costs that affect your business operations.
  2. Cost analysis: This process involves understanding the type of costs, frequency of costs and how they affect your business operations. Understanding how these costs are calculated is also very important in this process, as well as how you can influence the total amount of the various costs that affect your business.
  3. Cost mitigation: This process involves how you can reduce these costs as well as the associated risks involved in incurring these costs in your business.

The goal of cost management is not to reduce costs only, it also is to increase efficiency and effectiveness of costs incurred.

3 Examples of cost management

There are various ways to manage costs, such as:

  1. Cost allocation: There are some costs associated with overall business operations and not directly related to sales. For example, insurance affects the business and is not a direct cost of the good or service being sold. Taking a portion of insurance and including it in the total cost the goods or service being sold gives a more accurate cost of the good/service which will allow for more informed decision making in areas such as pricing.
  2. Resource allocation: This involves allocating resources in an effective manner to not incur unnecessary costs. For example in setting up your team for the day, pay attention to the strengths and weaknesses of each team member to ensure that the team is positioned to operate effectively.
  3. Cost estimation: This is a part of the budgeting process. It is important to estimate projected costs to be able to manage cost overrun or even to be proactive in deciding on sources of supply.

Cost control tools

There are key tools which are integral to controlling costs. These tools when used effectively will allow you to identify relevant costs, manage them to increase efficiency and reduce those costs where they are too high. These tools are:

  • Budgets: Budgets are plans of action for your organization. There are various types of budgets that apply to cost control. Budgets are created based on the goals, plans for action and strategies that the organization plans to execute. Having a plan of action which incorporates costs and timing for the required period will help to reduce overspending or spending that is not justified. Budgets also help to create a plan to ensure integral costs are not missed during planning. Tools such as budget software within accounting software packages, Microsoft Excel or Google Sheets can be used to create budgets for your organization. This format allows or listing your planned revenue and various expenses.
  • Variance analysis: Variance Analysis compares actual to budgeted results. Don’t miss this step in your budgeting process! It’s important to look deep into results and find out why budgets were achieved, surpassed or not achieved. This process involves cross-checking and justifying results. It also allows for the timely correction of errors in cost reporting and classification. Microsoft Excel is an excellent tool which supports variance analyses. There are formulas which can be applied to actual and budgeted results. It allows for charts to be created easily as well.
  • Key metrics: Using key metrics or key indicators allows for costs to be managed in relation to other results throughout your business. For example, labour costs can be examined in terms of your labour cost ratio. This allows labour costs to be compared to sales which is a key measure of efficiency and quickly indicates improvements that can be made in scheduling, team dynamics and training. There are several key metrics that can be used in control. Be sure to use key metrics that are relevant to your organization. Some key metrics can be found in your accounting software such as Quickbooks. They can also be built in a stand-alone Microsoft Excel Spreadsheet.

Cost of control 

The total cost of controlling costs will be dependent on the methods used to control costs.

For example, if your company is using software or other automation tools to control costs, the cost of control would vary compared to using a team member to navigate the process. If the process is hybrid to include automation and human input again the costs would vary. Always compute the opportunity cost of time, which is what else could this time be used to do?

The costs would include:

  • Software used
  • Labour hours
  • The opportunity cost of time
  • Other resources involved

It is important to weigh the costs of control in comparison to the benefits to be gained.

Is it worth for example controlling a cost which is $100 a month by using resources and time which costs $200 a month?

Cost control vs. cost reduction 

Cost reduction measures are direct steps to reduce or cut costs. Cost control relates to means of keeping costs within a certain range.

Cost reduction is often the term used to lower the cost per unit of an item sold. 

Both processes lead to overall increased effectiveness as well as efficiencies and of course, less money spent.

I have worked with organizations where both processes are essential. The focus or priority depends on what is happening throughout the organization as well as its external environment. In times of inflation or economic uncertainty the priority shifts to cost reduction. As an organization is expanding the focus may shift to cost control. 

This is again dependent on the goals, challenges and resources available. Whichever process is in effect, the quality of the product/service should never be compromised.

How to balance expenses?

“Balance expenses” is an official accounting term. It has been used interchangeably to mean:

  1. Verify expenses recorded to supporting documentation
  2. Cross-check expenses incurred to pre-set budget (variance analysis)
  3. Ensure expenses incurred are less than revenue for the same period.

How controlling costs and expenses increases your profit and cashflow

Controlling costs/expenses has the primary objectives of:

  • Reducing costs 
  • Managing costs 

When done effectively and efficiently, cost control can lead to reduced expenses which leads to increased profits which can lead to increased cash flow.

It’s important to understand that the expense reduction does not automatically lead to increased profits. Increased profits and cash flow are a result of the correlation of expenses/costs to sales being reduced. There are key metrics and indicators which track correlation and movement and these are important in the growth of profits and cash flow.

Expense control for modern finance teams

Today, over 15,000 customers save 5% of their spend on average as a result of switching to Ramp’s corporate cards with built-in expense controls, software pricing insights, and direct accounting integrations.

From local businesses like Smart City Apartment Locating to software platforms like TaskHuman and Shopify, companies are breaking free of the old mindset where finance teams controlled spending with reactive reimbursements and cards distributed to a select few. A new generation of finance teams controls spending in real time by counterintuitively issuing software-powered corporate cards to every employee, automating expense reporting at the same time. 

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President, The Cash Lab
When business owners find their businesses in financial chaos and are serious to take the leap to say hello to cashflow and MORE, they reach out to Kirsha Campbell. A CPA/CMA, Kirsha integrates all the moving parts in your business to set up the right foundation to be recession proof, operate with reduced risk, increase cashflow, set up effective systems and procedures and so much more. She also understands the need for businesses to have customized strategies that fit their particular situation. She is deeply passionate about helping her clients and is committed to forming lasting relationships. She has a heart for her clients and is deeply committed to their businesses being set up for success and be their “go-to” second brain for their business. Kirsha is a contributor to Entrepreneur Magazine and has been featured on Thrive Global, Authority Magazine and American Express for her insights and experiences. Volunteering and society involvement are very important to her and wherever she resides she gets involved in the community. She is also an immigrant who has experienced issues related to diversity, culture shock in addition to mastering adverse situations. She enjoys outdoor living and learning from each adventure and experience from her awesome twin boys! Her boys have challenged her to pour into other lives and encourage others with their daily struggles.
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