Key Issues An Entrepreneur Must Understand About Cost Control

Why an Entrepreneur Must Understand His or Her Cash Flows – Part 2
November 5, 2016
7 Examples of Application of the Pareto Principle for An Entrepreneur
November 21, 2016

Key Issues An Entrepreneur Must Understand About Cost Control

Hey there! Welcome back and let’s proceed straight into the topic of the day – cost control. Sometime back I wrote about opportunity costs in this blog platform, and I do hope that you read that article. If you missed it you could still access it easily through this link: Article on Opportunity Costs. Closely related to that is my article on business profitability which you can easily find here: Article on Business Profitability. As you read the above articles you might appreciate the importance of cost control.

The main reason why I’m coming back to the cost agenda is this – many enterprises make great revenue and blow it all away and hence cannot make great progress over the years. Profit and profit retention is important in an enterprise, and you should not excuse yourself from profit with whatever reasons you might have. Don’t you agree with me? Of course, one of the key elements that determine your enterprise profitability is the aspect of cost control. You could generate revenue in zillions of whatever currency you like, but if your cost control is poor your enterprise will still remain in the backyard. So, what are some of the key issues an entrepreneur must know about cost control?

  • Identify your key costs – whether variable or fixed. Entrepreneur, you are not going to lose sleep over minute or very minor costs in your enterprise. Don’t tell me you are going to start by focusing on a cost element that constitutes 0.5% of your annual costs! Look for something that takes say 10% of your annual budget and make that your starting point. Doesn’t this principle make sense? Your key cost centers or cost lines should be the prime areas of focus when you really intend to cut costs. These cost centers might be variable costs such as raw materials, power etc or fixed costs such as rent of premises.
  • Never be blind to alternatives. Some of us entrepreneurs occasionally have our thoughts cast in stone. Being blind to alternatives is very dangerous. You should systematically consider alternatives and opportunities for cost savings. Be wary of long-term contracts that tie your enterprise. When you start talking about difficulties in cancelling your warehouse rental contract with a family friend – even when you are paying about twice the market rate – then you are being blind to alternatives. Improve your purchasing and general procurement of goods and services. The alternatives you ignore could make you save millions of your business money. Isn’t this a possibility? 
  • Never ignore easy savings that you could take advantage of. Now, I know I mentioned above that you should start by focusing on your key cost areas. This should not mean that you completely ignore easy scores in cost control. Some of these can be achieved even with the laziest approach. Candidly, if you focus a pair of binoculars on your enterprise costs you could easily see areas where you can eliminate unnecessary costs and areas of waste or excesses. Even some areas of inefficiencies might be easy to identify. Just look a little more, and think a little deeper my friend. Can’t you? 
  • Negotiate all your major procurement of goods and services. One of the vital issues in your ability to control costs is the art of negotiation. I know some people are simply terrible in negotiation, and are certain of losing almost every negotiation battle. There are negotiation tips you could take advantage of. Some years ago I posted some articles on negotiation – and you could access these through the ‘Other Articles’ tab on this website. Do you desire to get good deals by negotiation? Do you want to cut costs and feel you could negotiate your way through this objective? Be mindful of how you negotiate my friend! 
  • Assign responsibility with penalties and rewards. I know you might be an entrepreneur in one small enterprise where you are everything – the MD, Financial Controller, Human Resource Manager, Marketing Manager etc. Probably this advice does not matter much to you. However, if you are running a medium-sized or large entity where you have many employees, you could consider this approach. Get people involved in your cost-cutting plan, and assign responsibilities with penalties and rewards. Let your staffs check their performances on costs against standards set and also the budget, and ensure they do this often. Don’t you think that Procurement Manager would be glad to get a bonus for saving money on procurement in a year? How about the Production Manager, don’t you think she would be glad to get a bonus for saving money on production power bill? Come on; be creative with your cost cutting objective!
  • Implement cost cutting with wisdom. Again, don’t take cost-cutting too far and implement it in a very crude form. Be wise. Consider issues such as quality, speed, work morale and staff motivation, risks involved, how to manage resistance to change etc. You are dealing with systems and human beings in your enterprise, and if you are not wise you might hit a rock. Don’t you think so?

Yes – if you desire to make profits and grow that enterprise to the next level you really need to be on top of costs, otherwise you will run in vain and have little to show for many years of business operations. Do you know why big enterprises today even hire cost-cutting consultants? What about you Mr. Entrepreneur?

Great weekend!

Till then,

The Wise Entrepreneur

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