Lambert Chapman LLP's Lisa Potter suggests "Controlling costs is more manageable then predicting the unknown."

Many business owners when looking at forecasting spend too much of their time on predicting the unknown (in the majority of cases) which is income.   Whilst generating income will ultimately make money for the business it is really important that businesses get to grip with what their costs are.   Costs are usually easier to manage by the business yet over the years it still surprises me the number that have no idea what their fixed costs are and what their breakeven sales target is.   In the current and even in a healthier climate these are crucial numbers every business small or large should know to be able to run profitably.

Once a business has a grip on all the costs incurred in generating income and its fixed costs, these can be used to work out what income level is needed to achieve break even and hopefully if exceeded a profit.   Cost control does not mean cutting costs that will have a detrimental effect on the business, it is about managing those costs that help to run the business.   Sometimes it may mean spending more and sometimes it will result in difficult decisions having to be made. 

Step 1 is preparation

1. Prepare a list of all the costs that are relevant to your business and split them into headings.   eg.  Labour, Materials, Overheads, Fixed, Variable, Production, Administration and Marketing
2. Work out what you need to spend under each of the headings set above to enable the business to work efficiently 
3. Ensure that your accounts system enables you to collate data on expenditure quickly and accurately
4. Ensure that you have an early warning system in place if costs become out of control
5. Ensure that members of your organisation are aware of the costs that relate to areas that they can influence
6. Make enquiries of your team as to how costs can be reduced without affecting the running of the business
7. Decide on the frequency that you will review costs

Step 2 is the control of costs

1. Make sure that records are reviewed in accordance with the frequency previously decided, at least monthly is recommended
2. Enquire sooner rather than later on costs that are above budget, find out why
3. Take action as soon as possible to correct costs that have risen
4. Ensure that systems are in place to prevent this occurring again in the future
5. If you can not do anything to eliminate the overspend look at what can be done to compensate
6. Obtain feedback from the team as they may have the solution but are just waiting to be asked
7. Praise the team where costs are maintained or savings made, the process should not only be negative one
8. Use what you have learnt to take your business forward in the future

And lastly, make your Accountant your friend, helping clients to prepare budgets, adopt and monitor them is what we do, it‘s not all end of year accounts and tax returns.  We are here to help so don’t be afraid to ask for it.

Date:19 November 2009

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