Nothing weighs a small business down like poor cash flow. 

You can avoid this scenario by developing a solid cost management strategy for your business. 

Effectively outlining everything you need to know about your business at a glance, a solid cost management strategy ensures you’re providing your product and service efficiently. 

This process doesn’t need to be complicated or time consuming; it starts with having a solid understanding of the underlying costs and cost drivers within your business. 

To begin, break your business down into two main sections: 

  1. Understanding your cost base  
  2. Identifying cost reduction or efficiency-saving initiatives 

Next, action the 10 simple steps for each section I have outlined below. 

I recommend setting aside an hour to complete the steps for each section. You won’t regret the time spent as by the end of the hour you will have a much clearer idea of your current financial position and where you want to head. 

1. Understanding your cost base

  1. Start with current and prior year profit and loss reports. 
  2. Review line by line cost items and establish underlying drivers. 
  3. Categorise costs above into fixed or variable and one off or recurring in nature 
  4. Allocate the cost items above to relevant cost categories. The cost categories will differ based on type of organisations. However, most common types are direct costs (of producing goods or services), distribution, marketing and sales, customer service and support and general administrative costs. 
  5. Compare costs to prior years and establish trends. 
  6. Compare costs to budget and understand the reasons for the increases / decreases. 
  7. Identify, understand and where possible quantify risks and opportunities. 
  8. Re-establish cost targets. 
  9. Regularly measure, monitor, and report on performance against targets. 
  10. Review and update cost targets at least quarterly. 
Infographic: How to understand your cost base - 10 steps for small business
FREE DOWNLOAD: How to understand your cost base in 10 simple steps

2. Identify cost reduction or efficiency saving initiatives

  1. Engage team contributions to cost reduction and cost saving initiatives, including setting up clear accountabilities, KPIs and rewards to encourage participation. 
  2. Review major supplier contracts and explore options to negotiate favourable trading terms. Make use of supplier discounts for bulk buying or incentives for early payments. Consider shopping around for better rates. 
  3. Review all service contracts and cancel those no longer used. 
  4. Consider outsourcing or sub-contracting non-core activities. 
  5. Utilise digital marketing and networking to increase market presence and engage with existing as well as potential customers. 
  6. Utilise virtual technology to reduce business related venue hires, travels, accommodation, and entertainment costs. You may also consider if the business can operate virtually. 
  7. Review hiring policies and staffing strategies. It may be better to fill short term staffing needs with contract / temporary workers. 
  8. Review business processes and consider automating manual tasks. 
  9. Speak to your financial service providers and consider options to consolidate credit cards and other debts. 
  10. When embarking on major projects, understand and evaluate options based on desirability, feasibility, viability and associated risks and opportunities. 

Need more information? Email me: [email protected] 

Fincraft Accounting & Advisory: Why you need a solid cost management strategy
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