One of the only ways to make money in the business world is to keep control of the costs and expenses after successful sales assuming that pre-sales quotation calculation is properly done. It is exaggerated, but a valid point is existing here. The profit margin is correlated with controlling the cost and expenses, which means better control for expenditures the higher profit margin received or vice-versa. Yes, everywhere are exemptions, but we don’t focus on them today. Let’s see first, what is the cost and expenses and then how to control them.
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- Cost is the money needed to buy, do, or make something. It can also be defined as the expenditure required to create and sell products & services or acquire assets.
- Expense is the reduction in the value of an asset as it is used to generate revenue. It can also be defined as an expense is the cost of operations that a company incurs to generate revenue. Keep in mind that the cost of goods sold (COGS) is also an expense in meaning and nature.
The key difference between Cost and Expense is that cost refers to the amount spent by the business organization to acquire an asset or to create the assets. In contrast, expense refers to the amount spent by the business organization for the ongoing operations of the business to ensure revenue generation.
| Cost | Expense |
| Do not reflect company profitability | Impact company profitability |
| Asset purchasing | Needed to generate revenue |
| One time purchasing | Periodically purchasing |
| No affection for tax | Tax is deductible when you generate revenue |
| Impacting the balance sheet | Impacting the income statement |
| Examples: fixed assets, prepaid expenses, inventory, etc. | Examples: deprecation, raw material expenses, rent, licenses, etc |
The difference between cost and expense table source
So anyway the costs and expenses are expenditures that you will spend or give away money or assets to get something back such as products, services, rights, etc.
Let’s see how we can control the expenditures. Luckily there are some approaches and methods to make them and let me highlight some of them. I bring out five options but many more methods that can be implemented if expenditures need to be controlled or reduced.
- 👉The first and simple method is nothing to spend, but then you cannot run your business in the long term, because offering the services or physical products is more or less needed for some expenditures as well. Yes, sometimes is possible to freeze some operations until the business clime or macro-environment improves, but this is a short-term period and not last forever. Otherwise, in the long run, you may lose your existing market share and customers to the competitors.
2. 👉 In good times businesses will not make strict and clear assessments or distinguish the expenditures, what is needed, and what is nice to have. It is essentially important to get rid of the nice-to-have expenditures immediately if the business environment worsens or the company is losing some key customers and sales. The nice-to-have sample expenditures can be different duplicated software or IT platform usage licenses, actual building rent needs, traveling and/or lodging needs, office coffee machine rent, personal periodical educational training, team events, etc.
3. 👉 Value chain processes and manpower needs should be over-checked from time to time, there is more or less some waste existing even in the best-managed global companies. One of the easiest and quickest steps is to look over MRP (Material Requirement Planning) or ERP (Enterprise Resource Planning) inventory and material reorder points together min/max levels to make fewer expenditures for some periods. By the way, it helps to unlock some money under inventory value as well.
4. 👉 Existing company structure and roles should be assessed critically periodically, is there anything that can be replaced with outsourced services, which can be used short period instead of keeping someone occupied full time? The hired team motivating and leading will require time and effort with hidden indirect costs, which usually managers can’t see or pay attention to. The keyword is focus and if it is most of the time for managing the personnel then we can talk about indirect costs which can outweigh the hired team’s total salary costs and performance outcomes (starting with the lost business opportunities, slow or strange business process changes, bureaucracy creates more bureaucracy, etc). The good news is that you can always outsource all kinds of administration roles such as IT/IS experts, Accounting, Legal, HR, Project management, Assemblers, Marketing professionals, Engineers, HSE experts, and Security just name it. By the way, sometimes is reasonable to outsource extra hands for business peaks times instead of hiring.
5. 👉 Focusing on products and services COGS, then there are more or less infinite options on how to reduce expenses and costs. Here are some samples such as checking the alternative suppliers on the market, changing the final product or service design, changing components inside BoMs (Bill of Materials), and looking at the existing manufacturing methods, tools, or team needs. Einstein said that if you make every day the same way something then don’t expect to get a changed or different result tomorrow.
I know that the most critical part is changing the team, but it is vital to do so instead of wasting time and money on training them and hoping that tomorrow everything will be fine. We have good samples from the start-up world, to get something done fast and better growth after changing the team partially or fully. Those businesses that understand that teams need to be replaced fast have been tomorrow’s winners. There is nothing strange if a start-up company changes its own team 2-3 times in one year with or without the pivots. It can be used in old school (conventional) businesses as well and not sitting in the comfort zone 24/7. So, here is something to think about more deeply and carefully.
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Our procurement auction platform BzCall.com can lend a helping hand to control and reduce the expenditures. You can make a procurement auction for outsourced services such as Marketing services, Accounting, IT/IS services or experts, HSE services, Assemblers for production, cleaning services, any other third-party auditing services, etc. Always bring to compete each other at least two vendors or experts (remember that more is better here) and one more tip here, play for hour rate, not the entire project or task value, which helps to lower the service fee. We like it if it is a win-win for every stakeholder end of the day.
Written by Gert
Last time edited: 10.09.2023
