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If you aren’t controlling your business’s costs, you could be leaving money on the table.
While all companies naturally incur some expenses as a part of doing business, that doesn’t mean you shouldn’t think critically about where every dollar is going. After all, every dollar you spend is a dollar that you can’t enjoy as profit or reinvest in either your operations or employees.
In this article, we’ll offer a detailed explanation of cost control and why it’s so important to any small business. We’ll also give you 6 important cost control tips that you can implement immediately to ensure that you’re maximizing your company’s potential for profit.
What is cost control?
Cost control is the process a business undertakes to evaluate its spending and ensure that working capital is being deployed as efficiently as possible. While there is no set process that all businesses must follow, cost control will typically involve:
- Establishing a budget for your business or project
- Estimating costs for a given timeframe (typically done quarterly or annually)
- Identifying costs that can potentially be eliminated or reduced
- Tracking expenses as they are incurred
- Comparing actual costs against projections and refining the process for future estimations
Cost control is also called expense management, expense control, and spend management.
Why is expense control so important?
To understand why expense 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 is under your 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, or to reward shareholders.
Likewise, lowering your costs of business by avoiding overspending makes it possible to charge your customers less for your products and services without compromising your quality—or profit margin. Cost savings, in other words, can be a competitive advantage, helping you attract new customers while retaining your existing customer base.
6 ways to improve your business’s cost control
How you approach expense management and cost control will depend on the specifics of your business and existing workflows. Small businesses where one or only a handful of people handle all spending, for example, will have a much simpler time with cost management than larger businesses with dozens or even hundreds of people incurring expenses.
While there is no one “right” way to do spend management, there are a number of strategies that you can use to optimize your business’s spending habits regardless of your size or complexity.
1. Start with your budget
If your goal is to cut business expenses as much as possible, you need to know how you plan to spend money in the coming month, quarter, and year. And that means creating a budget that accurately and realistically details your expected income and expenses for the period. After all, when you know how your business plans to deploy its capital, it becomes easier to prioritize the expenses and initiatives that you believe will truly move the needle while deprioritizing everything else.
Of course, creating a budget will in and of itself only get you so far. It’s also critical that everyone in your organization sees the importance of sticking to—and improving upon—the budget. You can gain buy-in by including all of your organization’s key stakeholders in budget talks. This should include your finance team, project management team, and department heads (marketing, sales, product). Even rank-and-file employees should be made aware of how their actions and purchases have the potential to make or break the company’s budget.
2. Leverage real-time expense monitoring
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 are not represented on your balance sheet. This makes it difficult to know whether or not you are staying on budget or whether your accounts payable are experiencing an expense variance that needs to be controlled for.
The good news is that your business and employee expenses don’t need to exist on a constant lag. Tracking business expenses in real-time improves cash flow, increases transparency, and offers more opportunities for you to know how well your actual costs are stacking up against your projections.
Some steps you can take to implement real-time visibility include:
- Leveraging corporate cards. When employees make a purchase with a corporate debit card, the expense is more immediately reflected on your balance sheet.
- Pre-approving employee expenses. When expenses are approved before they’re incurred, there’s no delay waiting for an expense report.
- Shortening expense submission periods. If you currently require expense reports be submitted on a monthly basis, consider requiring them on a weekly or bi-weekly basis.
3. Categorize your expenses
There are a lot of ways you might slice and dice costs into different expense categories. Some important expense categories to know include:
- Deductible business expenses, which can be claimed on your tax return to lower your tax burden each year
- Non-deductible business expenses, which do not count toward your deduction
- Recurring business expenses, like subscription payments, which occur on a regular, repeating schedule (weekly, bi-weekly, monthly, quarterly, or annually)
- Fixed business expenses, like rent or lease payments, which remain stable over time
- Variable business expenses, like 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 expenses, like overhead, which are not directly tied to creating a product or service
By properly categorizing your business expenses it’s possible to 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 to potentially scale back or otherwise cut down on spending.
If you see that travel expenses account for the vast majority of your business spending, for example, you might decide to take measures to cut that in 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, entertainment—for a more granular understanding of where your money is going.
4. Automate your expense approval process
Automating your company’s expense approval process can help to greatly streamline your workflows.
The best place to find areas for automation is to look for parts of the process where your staff is currently spending the most time. This may include receipt collection, mileage calculations, or expense categorization.
5. Take a closer look at SaaS vendor spending
As businesses grow, it’s common for different teams and departments—product, marketing, sales, finance, IT—to become increasingly differentiated and siloed. If you aren’t keeping an eye on your software contracts and spending, this can lead to some redundancies that could be unnecessarily inflating your business’s SaaS costs.
With this in mind, it’s a good idea to take another look at your SaaS vendors to determine whether it’s really necessary and cost effective to continue paying for each vendor and tool. Common issues that a vendor spend analysis can reveal include:
- Multiple subscriptions or contracts with a single SaaS provider: Do two (or more) teams in your organization have their own contracts with the same 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 utilization rates can lead to thousands of dollars in savings.
6. Outline everything in your expense policies
Cost control isn’t always easy. Achieving success will require all of your employees to be aligned and working toward the same goal of reducing unnecessary spend.
That’s why it’s so important that you document and outline your processes and expectations, as they relate to expenses, in various company policies, including your:
These documents should clearly outline which employees are allowed to make purchases on behalf of the business, what counts as an eligible expense, the timeline for submitting expense reports, what documentation is required, and spending limits. To ensure compliance, you should update and disseminate the document anytime you change or adjust any policy.
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 businesses can find ways to cut back and become more profitable.
Ramp’s platform supports your cost control efforts in a number of ways:
- Issue corporate cards with pre-approved spending categories and limits to facilitate real-time expense monitoring
- Manage expenses reports and submissions from one central platform—including receipt collection, mileage calculations, and more
- Manage vendor spend, SaaS utilization rates, contract terms, and pricing
- Automatically conduct expense reporting to forecast spending and compare actual costs against your budget
- Connect to a number of popular accounting, collaboration, security tools, and bank accounts via integrations
Want to learn more about how Ramp can help you get spending under control for better expense management? Request a demo, or try Ramp for free today.