10 Ways Your Accounting Services Team Can Improve Your Cost Management Strategy
Last Updated April 6, 2023
There is a high chance that you already have a bookkeeper. However, your accounting and bookkeeping departments are probably too overworked to pay attention when your cost per unit rises. You find yourself suddenly short on funds. Now what? Surely there must be a better way? Why look for one when we can give you 7 instead? Continue reading to discover our top 7 cost management techniques.
Why is Cost Management Crucial?
Cost creep, often known as price creep, is the gradual and steady increase in asset prices caused by consumer acceptance of and willingness to pay for progressively increasing costs. Cost creep can happen if you don’t have someone responsible for keeping an eye on both fixed and variable costs.
Utilize these many tried-and-tested cost control strategies to manage your business’s expenses.
Identify your variable and fixed costs
Have your accounting services company print and group by vendor all of the transactions from the previous month before you begin. Write “fixed” or “variable” next to each vendor to categorize them.
Remind yourself that a variable cost is an expense that is directly related to sales, such as the cost of raw materials, direct labor, or anything similar. On the other hand, fixed expenses are any costs that are not connected to the sale of your goods or services, such as rent, insurance, or administrative staff salaries.
You should note that in addition to fixed and variable costs, some businesses also track semi-variable costs. If more energy is consumed as manufacturing volume rises, for instance, the cost of an electric bill could be divided into a fixed and a variable charge.
Planning, bargaining, and forecasting are made easier when you understand your cost structure and the difference between fixed and variable expenses.
Fill out the accounting software with your budget
Start by creating a budget that outlines all of your income and expenses. This will help you see where your money is going and identify areas where you can cut costs.
Many business owners already have a budget, but they haven’t entered it into their accounting program. However, if you go through the extra process of setting up the software, it will gather your current expenses and make a budget-to-actual report for the entire month. Your cost management strategy is driven by variance analysis, which is driven by budget-to-actual reporting.
Develop a cost management plan
Your budget-to-actual report’s findings will help you determine which line items will reduce your spending. Because they have the greatest impact on performance, some firms prefer to give the highest dollar variances priority. Some people choose to focus on the actual expenditures that deviate the most from the anticipated costs.
There are things you may take to lower your variable and fixed expenses regardless of whatever choice you select.
Lower variable expenses
Although variable expenses are related to variations in output, this does not indicate that they rise as your company expands. For example, your variable expenses might not rise by the same percentage if you raise production by 10%.
There are several strategies to increase your margin without compromising quality:
Investigate volume discounts
Take advantage of when merchants permit you to buy larger quantities of things at a cheaper price if your cash flow can manage it. It can’t hurt to inquire if your provider doesn’t specifically state that this is a possibility and you’ve kept up a solid rapport with them
Regularly review vendor contracts
Set reminders for contracts that are about to expire and review your vendor agreements annually or biannually. Before renewing any vendor contracts, you need enough time to look around for different suppliers with enticing conditions.
Centralize the buying process
If at all possible, designate one person in your organization to be in charge of contract negotiations and purchase for everything from internet services to office supply orders. This job is centralized so that this person becomes an expert in economically responsible decision-making.
Lower fixed costs
Considering that your fixed costs are typically constant, it’s simple to get comfortable with them. However, there are always ways to keep a closer watch on these expenses:
- If you can, reduce your size. Consolidate and streamline your activities, whether that entails finding a more cheap site, renegotiating your lease’s conditions, or subleasing unused space.
- Whenever possible, outsource. Paying staff is only one aspect of the hiring process. You must also take employment taxes and perks into account. Instead of recruiting an internal employee, outsource professional services to reduce overhead.
- Look for fresh suppliers. Review all contracts pertaining to fixed expenses on a regular basis. Avoid agreeing to auto-renewing contracts, and if you do, establish reminders for the day before they expire.
- Modify your compensation plan. Consider changing the pay structure of your employees to one that includes a variable component typically linked to revenue, instead of firing them to save money. For instance, if you offer a greater commission rate, your best salesmen might accept a lower base income.
- Make an effort to use less energy. You can save money each month by making small efforts to increase your energy efficiency. To better control the temperatures in the office, turn off lights and equipment when not in use, switch to LED bulbs, or install a programmed thermostat.
- Some fixed costs will always be a part of your organization. However, your company will be better prepared to weather weak sales periods if you take advantage of opportunities to turn fixed costs into variable ones.
Lower your break-even point to start making money sooner
The number of sales required to earn a profit of nothing is known as the break-even point. It is the income level required to maintain your firm. The equation for it is:
Break-even Point = (Overhead Expenses + Balance Sheet Payments) / Gross Margin
Your break-even point is the number of sales you must reach in order to start turning a profit. It serves as your benchmark for assessing how well your company is performing—the absolute minimum required to keep the doors open.
(Overhead Expenses + Balance Sheet Payments) / Gross Margin = Break-Even Point
For example, a fictional Company A begins with a $5 product that they made themselves. That indicates they sold 10,000 copies, which equates to $50,000 in variable costs.
The company intends to reduce fixed costs from $25,000 to $20,000 while improving costs per unit from $5 to $4. The business’s month would now look like this if it still sold 10,000 units of its product:
|Variable Costs (COGS)||40,000|
|Fixed Costs Overhead||20,000|
Their break-even point drops to almost $17,000 a month by saving $1 on their cost per unit ($1 x 10,000 units decreases variable costs from $50,000 to $40,000) and by eliminating $5,000 from their fixed expenditures!
Spend money on expenditure management software
Poor record-keeping is one factor in cost creep. However, there is a tonne of software solutions available that may automate these procedures and help you keep better track of your business spending. You may set specified maximums, authorize employee spending automatically, and monitor them in real time with tools like Expensify and Divvy. Additionally, since the software keeps track of everything, your books are simple to maintain.
Every week, run your transaction report
Make cost control a regular procedure. Set aside a certain day every week to review your transaction report. You should be able to spot any inconsistencies as the company’s owner and make sure you’re only paying for the services you require.
Creating a culture of financial responsibility throughout your organization and shifting from reactive to proactive decision-making should be your aim. You’ll have more influence over your company as a result, and you’ll also cultivate a growth attitude.
Using professional bookkeeping and accounting services will streamline cost management
You want to make the proper decision the first time when it comes to the financial destiny of your business. And it’s OK to seek professional assistance to develop a plan that will not only enhance your control over expenses but also track cash flow, control labor costs, and pay off debt. One strategy for positioning your company for market success is to collaborate with specialists for CFO services or small-business accounting services.
Reduce risks and save time
By relying on adaptable CFO and accounting services, your firm gains. Reduce the time you spend creating a financial strategy that works for your company and increase the time you spend carrying it out. Additionally, to lower risk, add a layer of security between the CEO and the rest of the top management.
Review your investments:
If you have investments, review them regularly to ensure they are performing well and adjust your portfolio as needed to maximize returns.
Build an emergency fund:
Having an emergency fund can help you avoid high-interest debt and cover unexpected expenses. Aim to have at least three to six months’ worth of living expenses saved in an easily accessible account.
Seek professional advice:
Consider seeking professional financial advice from a financial planner or advisor to help you create a comprehensive financial plan and identify opportunities to manage costs.
Does accounting services ideal for you?
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